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Tencent's Biggest Shareholder Looks to Fix Valuation Snag

05/12/2021 | 09:16am

By Alexandra Wexler

JOHANNESBURG -- Naspers Ltd., Africa's most-valuable listed company, is taking another swipe at bridging a $100 billion valuation gap between its market capitalization and the value of its stake in Tencent Holdings Ltd., long a headache for its investors.

Naspers is offering holders of ordinary shares the opportunity to swap their stock for newly issued shares of its Amsterdam-listed subsidiary, Prosus NV, which is the largest shareholder in Tencent. The Chinese internet giant has a market value of about $739 billion.

Naspers and Prosus Chief Executive Bob van Dijk estimates that the move could create immediate value of about $11 billion for shareholders.

Naspers has been trying to narrow the gap since 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.

Prosus's 29% stake in Tencent is worth about $214 billion, 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. That has presented Naspers executives with the riddle of determining how to unlock value for shareholders without cashing out on one of the world's most successful tech companies.

"At the core of it, it isn't complicated: As a Naspers shareholder, you can now exchange Naspers shares for Prosus shares," Basil Sgourdos, chief financial officer of Naspers and Prosus, said in an interview. "As a result, you increase value because Prosus trades at a lower discount to Naspers."

The major reason that the valuation gap is wider for Naspers than for Prosus is the size of Naspers on the Johannesburg Stock Exchange, Mr. Sgourdos said. Naspers, which now comprises more than 23% of the benchmark JSE SWIX Index, has become a constraint for local index-tracking funds, which can't hold too much of a single stock.

The problem had become more acute as the gap widened during the past year, when the coronavirus-induced rally in tech stocks pumped up valuations of Tencent. While many of the companies listed on the exchange shrunk during the pandemic, Naspers shares were boosted by Tencent's gains. That means that when Naspers stock goes up, many South African investors need to sell, which can widen the discount of Naspers relative to Tencent.

Analysts say this latest move is progress, but not a panacea.

"Management are taking steps in the right direction to address the discount by reducing the size and weighting of Naspers in the South African indices," said Neelash Hansjee, portfolio manager at Old Mutual Equities in Cape Town. "This is a big deal despite the remaining complexity of the structure."

According to Mr. Sgourdos, the share swap should reduce the size of Naspers on the JSE to about 14%, relieving some of the pressure to sell the company's shares when they rise closer toward the value of Prosus.

"This is a very significant and sustainable move that we're making," Mr. Sgourdos said, adding that it frees up executives' time to focus on growing the businesses rather than solving the structural issue of the valuation gap.

Executives say the proposed transaction, which is expected to more than double the Prosus free float to 60%, is also good news for Prosus shareholders: The inflow of cash from index-tracking funds is expected to propel the company to a top 20 spot on the Euro Stoxx 50 Index.

Prosus will acquire up to a maximum of 45.4% of the issued Naspers ordinary shares, which, together with shares already held, will give it an economic interest of no more than 49.5%, the companies said. If the offer is taken up in full by Naspers shareholders, Naspers's holding in Prosus will be reduced to 57.2% from 73.2%. The offer is expected to be implemented in the third quarter of 2021.

Naspers originally paid $34 million for a third of Tencent in 2001, years before the operator of the WeChat messaging app became China's most-valuable publicly listed company and the world's largest videogame company by revenue.

Write to Alexandra Wexler at alexandra.wexler@wsj.com

(END) Dow Jones Newswires

05-12-21 0915ET

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