Steven Nathan on Naspers management and Alexander Forbes’ sale of its life insurance to Sanlam

Naspers came to a crossroads last week as 36 activist investors teamed together against the complex shareholding structure and lack of management alignment in Naspers and Prosus – South Africa’s two largest businesses. The Naspers executive team, led by chief executive Bob van Dijk, has been under scrutiny by market participants for a number of years. Steven Nathan, founder of 10X Investments, joined the BizNews Power Hour to comment on the management of Naspers and the giant’s precarious position. Another significant deal, Alexander Forbes’ sale of its life insurance to Sanlam, was also discussed with Nathan’s knack for explaining complex financial structures in simple terms ever present. – Nadya Swart

Steven Nathan on the relevance of Alexander Forbes selling its life insurance business to Sanlam:

So Alexander Forbes has a name, a household name, really, as an administrator of pension funds in South Africa. They are the largest pension fund administrator, but over the years they’ve diversified that business very significantly. So, not only were they in pension funds, they’ve gone into investment management, they have a large multi-manager. They’ve gone into insurance; they had a short-term insurance business, they have a life insurance business. They went into Africa and they went overseas. A lot of what they did actually wasn’t very good. So they are exiting a lot of those businesses to get back to (kind of) their core, what they call their sort of advice business for clients – both retirement fund clients, so pension funds, and also individuals. And they’ve been selling off these non-core businesses and they’ve sold off their short-term insurance business to Momentum. I think it was about R600m, roughly. I think that was the price. And now they’re selling off their life insurance business.

So this is a business that underwrites life insurance, that takes the actual risk; when claims go badly, then they obviously have underwriting losses. But it’s also [a] very capital intensive business. So you need to hold quite a lot of regulatory capital. So they are trying to move away from the so-called capital heavy businesses to capital light businesses and focus much more on kind of services as opposed to a capital head business. And you mentioned the price – R100m; it does look low. If you look at that business a few years ago, if we go back to I think it’s about 2019, that business was making an operating profit of about R90m. Now that’s before some costs, but it does look like it’s a business that has suffered in the last few years. But the price does look low from the outside.

But one would expect that internally they would have done a proper thorough corporate finance sale and an arm’s length sale and gone to test it in the marketplace, because there is always a little bit of concern that Sanlam and Alexander Forbes and throw in African Rainbow Capital, are all very close. There’s cross shareholdings and businesses being bought and sold amongst each other. And it just so happens to be that Sanlam is the buyer on this occasion. But I would expect that from a corporate governance perspective, there was an arm’s length sale that has taken place there.

On the close friendships that have moved from Sanlam to African Rainbow Capital and why this might be problematic:

It could read like a soap opera and maybe one day there will be a series on it, but it goes back many years to the early 2000s. When Sanlam first did their major empowerment deal, they bought on board an empowerment consortium that was headed by Patrice Motsepe. It wasn’t only him, it was a broad-based consortium – but one never really knows who gets what in these consortiums, what trade. But that introduced empowerment shareholding of about, I think it was, 10% at the time led by Patrice Motsepe. And that stake has done very well over the last (probably) almost 20 years now. Not quite, probably 15, 16 years. It’s done very well, so as an empowerment shareholder – in fact, as any shareholder – you get dividends and you can reinvest those dividends.

And what Patrice Motsepe has done is he – they formed African Rainbow Capital, which is a black empowered investment vehicle. And that was funded – in large part – by the proceeds of the dividends that his company would have earned from Sanlam. So it’s kind of like Sanlam sort of funded this company called African Rainbow Capital. And then two very senior executives from Sanlam joined African Rainbow Capital. That was Johan van Zyl, the chief executive, and Johan van der Merwe – who ran Sanlam Investment Management. So there was a bit of a management transfer that went out of Sanlam into African Rainbow Capital. African Rainbow Capital then invested into Alexander Forbes, so progressively – and today they own 35% of Alexander Forbes. So, they are the single largest shareholder – African Rainbow Capital, and Sanlam has also been selling some of its businesses, its investment management businesses, into African Rainbow Capital.

So now Sanlam also has a stake in African Rainbow Capital. So, there’s shareholdings between the three companies. There’s management. In fact, Dawie de Villiers, who is the chief executive of Alexander Forbes, was previously a senior person within Sanlam. So you can kind of see within this, I guess, triangle – there’s a lot of dividends flowing, cross shareholdings flowing, business sales flowing and people flowing as well. 

On whether the R100m deal was a bargain:

From the outside, one can’t tell, but I’m pretty certain [that] they [are] very well of the scrutiny that a transaction like this would attract given the outcome, given who the buyer and the seller is. So, I’m pretty certain they would have followed a very rigorous and transparent process with arms length and, in these sorts of things, you want to be really careful – especially if you’re a listed company, because you have directors that are sitting in both companies or in three companies or related parties. So you would expect that those directors would not be part of those discussions, [that] those directors would recuse themselves. And I’m pretty certain that they would have followed that process.

On the management style at Naspers from an investor’s perspective:

From an investor’s perspective, Naspers has been a knockout performer on the JSE. I mean, it really has been a share that has almost single handedly lifted the JSE over the last 20 years. Its performance has been staggering, even on a global scale if you compare it to people who had investors [in the] early stage in Google or Facebook. Naspers, because of their Tencent investment, is one of the most legendary transactions in the history of investing. As South Africans, we have to be incredibly grateful and thankful for that because most pension funds and most investors will have some portion of Naspers in their portfolio. So, the long-term track record is exceptional. The concern really is over the last few years. What is the best way to unlock shareholder value? Because the bottom line is when you are a listed company and you have shareholders, your primary objective or your responsibility to those shareholders is to maximise the return on the investment. And Naspers trades at a very substantial discount to its net asset value. In fact, even if you ignore everything else other than Tencent – it trades at something like a 40% discount to Tencent. Now there’s a bit of tax, so it’s not exactly 40% – it’s a little bit less than that.

But nonetheless, it’s a very sizeable discount to net asset value. So what a lot of the shareholders’ investors are saying is that the easiest way and guaranteed way to unlock value without taking any risk and risking our capital is just to unbundle Tencent. And by doing so, you’d get an enormous uplift in the share price. Because the way it works is that [if] the business is worth 100 and it’s trading at 70 and it’s a 30% discount, if you get back to one hundred, the 30 on the 70 is actually more than 30%. It’s like 45%. So you can unlock enormous value that way.

And what Naspers management is saying is no, no, no – we want to have another go at it. We did such a great job with Tencent and we want to try and find the next Tencent. We fancy ourselves as very astute private equity investors in the technology space and identifying these trends, and what we would rather do is have a go at using some of these proceeds and trying to find the next great technology company. And they’ve invested quite heavily in delivery and online platforms and classifieds and now, more recently, in education. So, they’re having that go. And the problem is that it’s a risky strategy, it’s an unproven strategy, and it’s an expensive strategy in two ways. The one is that you’re not unlocking the discount, so the share trades at a big, big discount.

And then you’ve got management that are being paid quite a lot of money; in absolute terms, the numbers are quite staggering. I think it’s over R100m that the CEO got. And you’re kind of saying, well, you’re getting R100m for sitting on a company that is actually destroying shareholder value. Because as much as you say your efforts outside of Naspers, the investments they’ve made, management shows charts and performance that in some ways looks very good. We’ve got 20% dollar returns on these investments, although I think some investors are saying, well, we’re not actually as confident about management, about those numbers. But nonetheless, the market is not giving you any value for that. So as much as you keep on beating the drum, what a great job you’re doing – the market is saying something else.

And there’s a bit of a conflict of interest because management is incentivised to look after themselves in this case – which is really to say [that] if we unbundled, we wouldn’t have a job and we wouldn’t be getting these enormous salaries. So management is conflicted, but that’s why you have a board – because the board should be independent and should be looking after shareholders. And the main challenge I think we have with Naspers is that it has an end share structure. So it’s got a low vote in shares, and you have, I think, Koos Bekker and a few other people who actually control the votes in this company. So even if you’ve got over 50% economic interest, your voting interest is so small and those are the people’s minds you would have to change to see this resolved. 

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