Naspers and Prosus have announced a transaction that changes the group’s financial structure. They hope this will reduce the large discount at which Naspers and Prosus trade to the underlying interest in Tencent and other assets. Tim Acker summarises the complexities of the deal and the actions Allan Gray has taken.
Naspers wants to address the long-standing gap between its market value and the sum of its parts in a share-swap deal. The deal is quite complex and involves a crossholding. In terms of the transaction, Prosus will issue new shares in exchange for a stake of about 45% in the parent, Naspers.
We need to elect whether our clients will participate in the transaction, which involves exchanging Naspers shares for Prosus shares. We are in the process of evaluating the options and will select whichever is in the best interest of our clients. The proposed share exchange is happening in August. Both options have merits, so the choice is not obvious.
We have two main concerns:
- We do not think the deal will be successful in addressing the discount. Complex structures are often counter-productive. Management believes the downsides of a crossholding structure have been mitigated, so we hope to be proven wrong on this point.
- The proposed exchange ratio is more favourable to Prosus shareholders than to Naspers shareholders.
Engagement over the deal
We were approached to be involved in a process that led to a letter that was ultimately signed by 36 South African asset managers and delivered to the Naspers board. We were involved in the discussion process, but we opted not to sign this letter, as we generally prefer to engage privately rather than publicly. We first wanted to establish all the facts and we preferred to engage directly with the company.
We have engaged with management more than once to understand the reasons for the deal and we have raised our concerns with them. We have also written our own letter to the board outlining our concerns and some suggestions. The concerns we raised are broadly similar to those raised in the above-mentioned letter, with some nuanced differences, as well as specific recommendations.
Suggestions for the company moving forward
We are in favour of the group simplifying its structure over time. We recognise that management is limited in the simplification options available, given required approvals from South African regulators and potential tax considerations.
We are also in favour of increased share buybacks, which take advantage of the large discount and create value for shareholders.