Naspers to end cross-holding structure

Yesterday, Naspers and Prosus enjoyed a good day, closing up 8% and 5%, respectively. Part of the gain was driven by Tencent rising by 2% in Hong Kong, but the rest was on the news of yet another group restructuring proposal. The latest brainwave will involve paying more fees to bankers, advisers and consultants. Well-known South African investor David Shapiro said what we are all thinking in the tweet below.

Naspers has always traded at a massive discount to the underlying value (NAV) of its assets. Goldman Sachs estimates that Naspers and Prosus were at 52% and 43% discount to NAVs before yesterday's restructuring announcement. Management have tried a few things to solve the problem.

First, they created and spun off Prosus, arguing that Naspers was too big for the JSE. This resulted in significant capital gain taxes for South African holders, and created a very complicated cross-holding structure between the two entities. Some investors warned management that a more complex holding structure would only increase the NAV discount.

Next they decided to sell down their Tencent stake and use the money to buy back their own shares. This worked in part, but they were getting close to Naspers's buy back limit. Yesterday's proposed transaction removes that constraint.

The plan now is to unwind the cross-holding structure by Prosus and Naspers by both issuing a wad of new shares. Naspers will issue nearly a trillion new shares, diluting Prosus's holding in Naspers to almost zero. Naspers will then do a share consolidation, cancelling most of the new shares issued, but leaving Prosus with an insignificant ownership stake. Prosus will then sell the shares it owns in Naspers. At the end of this process Naspers will directly own 43% of Prosus, and Prosus won't own any Naspers shares.

In my view, the cheapest and simplest way to reduce Naspers's NAV would be to sell the bulk of the Tencent holding, or to spin Tencent out directly to current Naspers shareholders. That option is unattractive to Bob van Dijk and Basil Sgourdos, CEO and CFO, because it will mean a much slimmed down group, and significantly smaller pay packages. At least the group is selling their Tencent stake, albeit slowly.