Naspers shareholders give with one hand and take with the other

At a general meeting attached to its AGM on Friday 23 August, Naspers shareholders voted overwhelmingly in support of the company’s plan to unbundle its global internet assets and list them on the Euronext in Amsterdam, with a secondary listing on the JSE.

Unlike the listings of other high-tech firms such as Uber and Lyft, where early investors are still under water, chances are that the listing will go well for several reasons.

Unlike Lyft and Uber, the listing is not an initial public offering and Naspers is not attempting to raise cash. Instead, Naspers will own at least 73% of the subsidiary, named Prosus, with about 27% made available for a free-float (shares that can be freely traded). This will be created by Naspers, which will issue its shareholders with one Prosus share for every Naspers share held.

Prosus will become Europe’s largest listed consumer internet company by asset value, and management hopes it will attract investment from a previously untapped pool of investors.

Some foreign fund managers have been unable to invest in Naspers because their mandates prevent them from investing in developing markets. This will change with the listing. In addition, Prosus will automatically fall into the Euro Stoxx 50 index, making it a shoo-in for at least a dozen index trackers.

The prospectus will be released this week and the executive team will present the company’s credentials in a whirlwind global tour of asset managers and investors, says CFO Basil Sgourdos.

The new company will hold all of Naspers’ internet interests outside of South Africa, including its 31% stake in Tencent and other investments in the online classifieds, payments and fintech, food delivery, etail, travel, education, and social and internet platform sectors.

Unlike Lyft and Uber, where profitability is a distant promise, the new company is likely to be profitable. Aside from Tencent, which posted attributable profit of $7.5-billion for the six months to June 2019, other parts of the business are now profitable.

“The classifieds business, which includes OLX, Avito and letgo is profitable,” CEO Bob van Dijk said at the AGM. “And the best is yet to come.” In addition, the core payments business, represented by PayU, is now profitable, but “we are still investing here”.

The food delivery business, represented by iFood, Swiggy and Delivery Hero, is still in a building and investment stage.

“It’s the biggest e-commerce opportunity I’ve seen in my lifetime,” said Van Dijk. “We will be a top 10 global internet company and in the next year will continue to push our core segments to greater profitability.”

The listing is the strongest indication that management is listening to its investors – as far as the sum-of-the parts valuation goes anyway.

For years, investors have complained that the Naspers share price does not reflect its underlying investment value. For instance, Naspers’ market capitalisation, currently R1.5-trillion, is below that of its 31% stake in Tencent, worth about R2-trillion; this discounts to zero the value of the other internet businesses.

“The discount matters to our shareholders,” said Van Dijk. “This listing is an attempt to reduce that without harming long-term growth.”

“There are many factors that are out of our control,” said Naspers chairman Koos Bekker at the AGM, “and the South African discount is one of those.”

However, management is doing what it can to unlock value for shareholders. It spun out MultiChoice in 2019 and in the process released $4-billion to shareholders. In 2018, Naspers sold its stake in Indian online retailer Flipkart to Walmart for about $2.2-billion, and prior to that it sold a tiny proportion of its stake in Tencent, using the proceeds to repay debt.

The spin-off and listing of Prosus is the next big step in this regard, says Bekker. Of course, the listing may not be enough to totally remove the discount.

“We will not know what the discount will look like until after Prosus is listed,” says Sgourdos. However, at this stage, he is confident it will be considerably narrower than the current 35%.

That’s because there will be no forced selling (by fund managers who have to keep Naspers restricted to a certain ratio in their portfolios), and the expected additional demand for the share is likely to drive the price upwards.

“If the discount does not narrow as expected, we will have to go back to the drawing board,” Sgourdos says. However, support for the motion suggests shareholders are fully behind management’s multi-pronged strategy to bring the share price more in line with its fair value.

That said, shareholders are not that supportive of Naspers’ remuneration policy and seemingly do not believe management should be rewarded as handsomely as they are, for doing a job they should be doing. Just 41% of shareholders voted in support of the company’s remuneration policy, down from 43% last year, but up from the 24% in 2017.

This is despite Naspers’ best efforts to get everyone on the same page.

The debate about executive remuneration has been ongoing since at least 2016 and the board has responded by engaging extensively with shareholders and upskilling its remuneration committee.

In 2018, changes were to made to the remuneration structure and to the way this was communicated to demonstrate more clearly the link between Naspers’ strategy, performance and its remuneration philosophy.

Reporting has also improved, with clearer links between strategy, performance, remuneration design, and remuneration outcomes, particularly how short- and long-term incentives are awarded. Several references were made to remuneration at the AGM.

Bekker kicked off the conversation: “We are bidding for services against the likes of Facebook, Amazon and Google; if we don’t pay the price we simply don’t play the game.”

Van Dijk added, “We have reorganised our business away from geographies into global sectors like classifieds and payments. This has enabled us to hire the best people in the world to run those businesses.”

And Craig Enenstein, chairman of the remuneration committee, noted that exceptional performance warranted an exceptional reward, adding that the opposite also applies.

“Remuneration must support our goal to be competitive; we need the best people to achieve excellent results. We compete with Apple, PayPal and others who are constantly trying to poach our talent.

“We would like to stress that we are listening to you,” he added. “We can’t implement every suggestion, but we are listening.” The 2019 remuneration report, published in July, gives every indication that Naspers has been listening to shareholders. However, shareholders are not yet convinced. BM