Naspers Has a $100 Billion Headache

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JOHANNESBURG—Africa’s largest-listed company,

Naspers Ltd.


NPSNY -0.28%

, is wrestling with an unusual problem: It made one unbelievably good investment that has now become a headache.

Naspers bought a third of

Tencent Holdings Ltd.


TCEHY 1.28%

in 2001, years before the operator of the WeChat messaging app became China’s most-valuable publicly listed company. The stake itself is now worth over $100 billion more than the market value of Naspers, despite the company’s other profitable businesses in areas like online classifieds, payments and retail.

The difference has presented Naspers executives with the enigma of determining how to unlock value for shareholders without cashing out on one of the world’s most successful tech companies. The problem has become more acute as the gap widened to new levels in the past year, when the coronavirus-induced rally in tech stocks pumped up valuations of Tencent and other tech companies.

“I don’t think there’s a senior person at the group level that isn’t involved in thinking through this problem and working on it,” said

Basil Sgourdos,

chief financial officer at Naspers. Mr. Sgourdos said executives are exploring more than 10 ideas to reduce the valuation gap, but he declined to elaborate on what options they are considering. Issues that any successful candidate will need to overcome include tax, regulatory, balance sheet structure and debt.

“With each idea and unpacking it, you learn something,” Mr. Sgourdos said. “That’s very valuable [intellectual property] in finding the final solution.”

Naspers paid $34 million for its initial Tencent stake, likely one of the greatest venture-capital investments of modern history. Now Tencent, the world’s largest videogame company by revenue, has a market capitalization equivalent to $780 billion.

Earlier this month, Amsterdam-listed internet conglomerate Prosus NV, which is majority owned by Naspers and houses the company’s international internet assets, sold $14.6 billion worth of shares in the Chinese internet giant. The sale, its second reduction in three years, cut its stake to 29%, currently worth about $226 billion.The market capitalization of Naspers is 1.53 trillion South African rand, equivalent to about $107 billion.

“We’re not happy where it is,” Bob van Dijk, chief executive of Naspers and Prosus, said of the valuation gap. “It’s a priority…to take further steps to address it.”

Mr. van Dijk said the near $15 billion windfall from the latest Tencent stock sale would be used to scale and expand the company’s online classifieds, payments, food delivery, retail and education businesses, as well as look for mergers and acquisitions. The company is hopeful that will make the businesses easier for investors to value, he added. Prosus’ portfolio excluding Tencent had a 20% internal rate of return during the six months that ended Sept. 30.

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The size of Naspers on the

Johannesburg Stock Exchange

has become a constraint for local index-tracking funds, which can’t hold too much of a single stock. While many of the companies listed on the exchange have shrunk during the pandemic, Naspers shares have been boosted by Tencent, and the company now comprises more than 25% of the benchmark JSE SWIX Index. That means when Naspers goes up, many South African investors need to sell their stock, which can widen the discount of Naspers relative to Tencent.

“It is creating concentration issues for many fund managers,” said

Kevin Mattison,

managing director at Avior Capital Markets in Cape Town, South Africa. To help narrow the gap, Naspers could show positive contributions from other businesses in their earnings, spin off one or two of those assets or pay special dividends, he said.

Analysts have attributed the persistent valuation gulf to a few issues. One is that holding companies consistently trade at a discount to their underlying businesses.

Second is a dividend-withholding tax that Naspers would need to pay should it sell its stake in Tencent and distribute the proceeds to investors—a scenario that Naspers executives have said is unlikely.

The valuation gap has become more problematic following the coronavirus-induced rally in tech stocks, which has pumped up the price of Tencent.



Photo:

aly song/Reuters

Another reason for the difference is that investors can also gain direct access to Tencent shares through Tencent’s Hong Kong listing.

Naspers took action to address the valuation gap in 2019, when it created Prosus to hold its international assets—the stake in Tencent, along with investments in tech companies such as Russian social-media operator

Mail.ru Group Ltd.

, German food-delivery business

Delivery Hero

and U.S. online marketplace Letgo.

The move initially narrowed the gap but not for as long as executives had hoped.

“What we didn’t know is that Covid would happen, and we’d be back in this position in six months,” Mr. Sgourdos said.

In October, Prosus said it planned to buy back up to $5 billion of its own shares and those of its parent Naspers, after losing out on two high-profile acquisitions.

Though a buyback doesn’t solve the structural issue of the discount, it unlocks value by purchasing stock at a discounted price relative to the actual value of the Tencent stake, Naspers executives say. Earlier this month, Mr. van Dijk said the company could do more share buybacks in the future.

“They’re in a difficult quandary. They’ve got a complex structure they’re trying to solve,” said

Neelash Hansjee,

portfolio manager at Old Mutual Equities in Cape Town. “Dealing with it is taking longer than people anticipated.”

Write to Alexandra Wexler at [email protected]

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