Naspers spin-off Prosus, which became Europe’s largest technology company this week, has always been something of a Gordian knot for investors.
The Amsterdam-based company derives the entiretey of its €141-billion market capitalisation from its 31% stake in Tencent, the Chinese e-commerce giant. Indeed, it trades at a US$59-billion discount to the value of that holding, meaning that investors essentially ascribe a negative value to its other investments, such as Russia’s Mail.Ru Group and Brazilian food delivery platform iFood.
Tencent stock has soared 57% increase this year, easily making it the best performer in the firm’s portfolio. This begs the question: Why would Prosus CEO Bob van Dijk put the company’s money in anything else? It’s hard to find other investments that can deliver similar returns. But equally, why invest in Prosus shares to get exposure to Tencent when you could just invest directly in Tencent itself? That’s the Gordian knot which van Dijk has the unenviable task of trying to unravel.
On Friday, Van Dijk seemed to tacitly admit the struggle to find other investments that could rival Tencent in terms of value creation by announcing plans to buy back as much as $5-billion shares in itself and Naspers, the South African parent company from which Prosus was spun out last year. It’s a sensible use of the company’s $8.7-billion cash pile, most of which derives from the sale of some of its Tencent stake two years ago.
Van Dijk learnt the hard way that shareholders are skittish about how Prosus uses its funds for new deal-making. The spin-out from Naspers was intended to reduce the discount at which the company traded to its Tencent stake. In the days immediately after the Amsterdam listing in September 2019, the ploy proved successful, as Prosus traded closer to the value of its holding in the Chinese firm.
But just weeks after the listing, Prosus made a £4.9-billion bid to acquire the British food delivery platform Just Eat. The company’s shares tumbled, reopening the valuation gap to the Tencent holding. Even though Takeaway.com ultimately bought Just Eat, Prosus continues to trade at a discount to the value of its assets. The Dutch firm still became Europe’s largest tech company by market capitalisation this week after SAP shares declined following a profit warning.
The buyback ought to provide some reassurance to investors that Van Dijk is wary about overspending on deals, though he can always sell more Tencent stock to fund massive acquisitions when a lockup expires next year. Plus they’ll benefit from the reduced share count through greater exposure to the Chinese giant.
Van Dijk isn’t so much cutting the Gordian knot as learning to live with it. And that might be what shareholders need. — By Alex Webb, (c) 2020 Bloomberg LP