A Swiss-based research and investment management firm, Alternative Investment Management & Research (AIM&R), says the proposed share swap between Naspers and Prosus is an “idiotic idea” that is certain to increase the discount between the share prices and the value of the underlying assets.

“In my 35-year career of analysing, investing and restructuring in global holding companies, I have never, ever seen a situation where a holding company would create another layer of complication in order to reduce a discount,” says AIM&R founder and director Albert Saporta in an open letter addressed to Naspers and Prosus CEO Bob van Dijk and sent to the media.

“It makes no sense whatsoever. Indeed, holding companies that actively want to durably reduce a discount simplify structures rather than complicate them, usually through major asset spin-offs and major share buybacks, something that Naspers has never done,” says Saporta.

Saporta has previously criticised Naspers for not doing enough to unlock value for shareholders. It is important to him – AIM&R uses an event-driven investment strategy that relies on corporate events to unlock value for investors.

“However, not content in having created a two-layer pyramidal structure into Tencent, you are now proposing an even more idiotic idea, and that is for Prosus to tender for Naspers shares.

“If this tender is successful, you will create a two-headed monster of a corporate structure where Prosus owns Naspers and Naspers owns Prosus, in a cross-shareholding structure – probably the most inefficient capital structure one can think of,” Saporta writes in his open letter.

‘Corporate monster’

“I can guarantee that the creation of the two-headed corporate monster, ie. a cross-shareholding structure, will lead to a higher discount for both Prosus and Naspers post-tender, possibly the highest ever seen.

“The reasons are clear: More complication, more confusion, and less governance cannot lead to a lower discount. Only simplification and transparency work.”

Saporta offers an example of a similar company structure to prove his point — a Hong Kong group, Jardine Matheson and Jardine Strategic, that had a cross-shareholding structure: “Both sold at unusually large discounts for years, if not decades,” he says.

Tencent’s Chinese headquarters … the elephant in the room

“Eventually and over the years, Jardine Matheson increased its ownership in Jardine Strategic to eventually make a cash bid a couple months ago at an unacceptable discount,” says Saporta, alluding to the fact that this might happen with Naspers as well.

“This would not only obviously rip off Naspers shareholders, but it would in the end transfer the discount problem from South Africa to the Netherlands,” he says.

Saporta also argues that the offer of 2.27 Prosus shares for every Naspers share is unfair.

He calculates that Naspers is trading on a 54% discount to net asset value (NAV) compared to Prosus trading on a 39% discount. “Why would anyone want to sell out of Naspers on such a high discount differential with Prosus for ownership of basically the same assets?”

He says arguments that a Dutch holding company will trade at a lower discount due to higher liquidity are flawed.

“The underlying assets are essentially the same and therefore there is no reason why the discounts should be widely different. Both shares are extremely liquid, and since Prosus’s IPO, Naspers has been actually more liquid than Prosus.”

‘They don’t understand’

Saporta wants Naspers shareholders to reject the offer or at least hold out for a better offer. “A discount neutral tender offer implies 2.75 Prosus per Naspers.”

Van Dijk, who is CEO of both Naspers and Prosus, rejects these arguments. “It is evident from the letter that they do not understand all the considerations,” Van Dijk said in an interview, adding that AIM&R never engaged with Naspers directly to discuss issues.

“The choice is straightforward. We can do nothing and continue to watch Naspers’s weighting continue to climb on the Swix from its already unprecedented 23% to much higher levels, or bring it down to 14%.

“If there was a better way to achieve this and still secure all the necessary approvals, that better way would have been on the table. We have spent a year on this and unpacked all the options,” said Van Dijk.

He admitted that the process seems complicated and that the technicalities aren’t simple. “While the execution steps seem complex, the end state is not. We have an Amsterdam-listed European consumer Internet leader and a Top 20 Euro Stoxx 50 company and one of the fastest-growing Internet groups. It will be owned 60% via Amsterdam and 40% via the JSE.

“Amsterdam shareholders get their full 60% share of any distribution from Prosus directly and JSE shareholders will also get their 40% as Naspers onward distributes to them. There is nothing complicated about that nor any significant added risks,” said Van Dijk.

He explained that South African policies with regard to locally domiciled international groups are clear. “When we were thinking about a solution, we knew what the regulations and policies were. We worked within these parameters.”

The most important is that Naspers remains domiciled in South Africa and will still be a South African taxpayer, as Naspers explained in several announcements following the announcement of the proposal some two weeks ago.

Prosus will increase in stature on the JSE and in Amsterdam with a larger free float of Prosus shares by issuing new shares as consideration. The Naspers free float will decrease significantly, as will its weight in JSE indices. The 45% shares to be held by Prosus will not count towards calculating its weight in JSE indices.

Simply wrong

Van Dijk says that AIM&R is simply wrong in its argument that the offer ratio is detrimental to Naspers shareholders. “They argue that the market has been wrong forever. In fact, the ratio that the shares have been trading at since the listing of Prosus is around 2.03 Prosus to Naspers,” said Van Dijk.

He said management has had a lot of discussions with fund managers and analysts since the announcement. “We have been working on this many months and have a head-start on understanding it. The discussions have been helpful. We explained and we listened.”

AIM&R also argues that the only way to unlock value is for Naspers and Prosus to unbundle the majority of the Tencent stake, keeping only enough to fund the development of its newer ventures.

“Allow me a cheeky answer to that,” said Van Dijk. “Unbundling was first mentioned in 2005 when the Naspers stake was worth a few billion, and again in 2015. Today we are glad we said no.”

He mentioned several compelling fundamental reasons to keep Tencent. “China is by far the largest market in the Internet world, with 1.3 billion Internet users. Second is India with around 500 million and third is the US with 340 million.

“Tencent has a great leadership team and its prospects remain excellent. We have learned a lot from Tencent and it gives us insight into the Chinese market to grow our other interests there. It also benefits the growth of our businesses in other countries.

“The global interests in Naspers, especially Tencent, are beneficial for South African shareholders. Fund managers can invest 30% offshore. Naspers gives investors the opportunity to invest in a huge international Internet stock and one of the biggest companies in China, on the JSE with local funds.

“Lastly, unbundling Tencent will create a big overhang of shares in the market that will be good for nobody,” said Van Dijk. He said there are other ideas, some of which were not in accordance with the regulatory framework. Others were fair to one set of shareholders but not the other.

“This is the best solution. It creates immediate value for shareholders and ongoing potential for growth, while Naspers remains the largest South African-domiciled company on the JSE.”