Unraveling the Complex Holdings of Naspers and Prosus: A Step Towards Share Buybacks
Introduction
The internet industry is constantly evolving with new advancements and growth opportunities. One such scenario involves South African internet group Naspers and its investment arm Prosus. This article explores the intricate mutual holdings between Naspers, Prosus, and Tencent, and how they are being untangled to pave the way for share buybacks. By delving into the complexities of this situation, we can better understand the implications for shareholders and the reasoning behind this strategic move.
The Cross-Shareholding Structure
For years, Naspers and Prosus have been working towards reducing the share price discount that undervalues their portfolio of global internet businesses. However, this effort has been hindered by a complex cross-shareholding structure between the two companies. This structure has not only introduced unnecessary complexity but has also limited the potential for share buybacks.
In an attempt to address this issue, Prosus has decided to exit its stake in Naspers, which is acknowledged as a negative by shareholders. By doing so, Prosus aims to remove the cross-shareholding structure and streamline its ownership interests.
The Need for Change
Investors have expressed their concerns about the existing cross-shareholding structure, believing it adds unnecessary complexity to the company’s operations. They argue that removing this structure will pave the way for more transparent and efficient business practices.
Furthermore, Naspers’ overweighting in the South African stock market has placed it in a challenging position. Fund managers have been forced to sell Naspers’ shares due to this overexposure, leading to an unfavorable share price discount. It is evident that a change is necessary to rebalance Naspers’ position in the market and regain investor confidence.
The Complications of Company Law
In addition to the complexities arising from the cross-shareholding structure, South African company law presents another obstacle to share buybacks. Specifically, subsidiary companies are limited in the number of shares they can own in their parent company, posing a potential limitation for Naspers in the future.
This legal constraint adds an extra layer of complexity to the share buyback strategy, as Naspers needs to navigate within the boundaries of company law to ensure the success of its initiatives.
Prosus’ Performance and Diversification
While working towards resolving the complexities of the cross-shareholding structure, Prosus has also been focusing on diversifying its business portfolio. The company reported a decline in core earnings, attributed to Tencent’s weaker performance. However, Prosus has been proactive in seeking opportunities beyond Tencent to generate profits.
- Prosus has ventured into various businesses, including online payments in India, food delivery in South America, and ownership of Stack Overflow.
- By exploring diverse sectors, Prosus aims to reduce its reliance on Tencent and mitigate risks associated with a single investment.
- This strategic approach allows Prosus to tap into emerging markets and capitalize on the potential for growth.
The Significance of the Tencent Investment
Naspers’ investment in Tencent, made over two decades ago when the Chinese tech giant was still in its infancy, has been a remarkable venture capital success story. The strategic bet on Tencent has delivered significant returns for Naspers, showcasing the power of long-term investments and early-stage opportunities.
Considering the longevity and success of the Tencent investment, it is clear that Naspers will remain a controlling shareholder in Prosus. However, the removal of the cross-ownership structure will better align economic interests and allow for a more accurate reflection of Prosus’ value.
Conclusion
Unraveling the complex mutual holdings of Naspers and Prosus marks a significant milestone in their journey towards share buybacks. By addressing the cross-shareholding structure, these companies are taking proactive steps to streamline operations, reduce complexity, and regain investor confidence. The challenges posed by South African company law and the need to diversify beyond Tencent further highlight the strategic importance of these decisions.
As the internet industry continues to evolve, companies like Naspers and Prosus must adapt and optimize their structures to unlock value and drive growth. With a firm commitment to transparency, efficiency, and shareholder value, these companies are poised to capitalize on emerging opportunities and solidify their positions in the global market.
Summary
South African internet group Naspers and its investment arm Prosus are working to unwind a complex set of mutual holdings that have hindered share buybacks. The existing cross-shareholding structure between the two companies has been deemed unnecessary and has limited the potential for transparent business practices. To address this issue, Prosus has decided to exit its stake in Naspers, aiming to remove the cross-shareholding structure and streamline ownership interests. However, the process is not without challenges, as South African company law imposes limitations on share buybacks due to subsidiary companies’ ownership restrictions. Despite these complexities, Prosus remains committed to diversifying its business portfolio beyond Tencent, which is experiencing weaker performance. By capitalizing on emerging markets and exploring alternative sectors, Prosus aims to reduce its reliance on Tencent and mitigate risks. The Tencent investment, made over two decades ago, has proven to be a remarkable success story for Naspers, highlighting the power of long-term investments. Although Naspers will continue to be the controlling shareholder in Prosus, the removal of the cross-ownership structure will better align economic interests and accurately reflect Prosus’ value. Overall, the unraveling of mutual holdings between Naspers and Prosus marks a significant step towards optimizing operations, regaining investor confidence, and positioning the companies for future growth in the internet industry.
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South African internet group Naspers and its investment arm Prosus, which owns 26% of China’s Tencent, will unwind a complex set of mutual holdings that had threatened to prevent share buybacks financed by sales of the Chinese tech group’s shares.
Naspers he said on Tuesday that Amsterdam-listed Prosus would exit a stake in its parent company that he acknowledged “is widely viewed as a negative by shareholders.”
Naspers and Prosus were by selling their Tencent shares as part of a years-long effort to reduce a share price discount that effectively gives no value to its portfolio of global internet businesses.
But the company said investors believe the “cross-shareholding structure introduces too much complexity” and “should be removed.”
Naspers and Prosus swapped shares in 2021 to address another discount factor, Naspers’ overweighting in the South African stock market that was forcing fund managers to sell its shares.
Naspers and Prosus chief executive Bob van Dijk said the cross-shareholding had been necessary to resolve the “clearly untenable situation” of Naspers which accounted for a quarter of the Johannesburg stock exchange, “but it is true that shareholders did not like and its purpose was served.
The structure meant that South African company law was also emerging as an obstacle to buybacks due to a limit on the number of shares subsidiary companies could own in their parent company.
“At some point Naspers will actually hit that limit,” said Basil Sgourdos, chief financial officer of Naspers and Prosus.
Prosus said on Tuesday that core earnings fell to $2.7 billion in the year to the end of March, down from $3.8 billion in the previous financial year, following a weaker performance from Tencent.
Prosus is looking to generate profits in other businesses, ranging from online payments in India to food delivery in South America and ownership of Stack Overflow, the question-and-answer platform for software engineers.
Naspers’ investment in Tencent, which was made more than two decades ago in what was then a fledgling Chinese start-up, is seen as one of the biggest venture capital bets of all time.
Naspers will remain the controlling shareholder in Prosus through supervoting shares, but said removing the cross-ownership would better reflect the economic interests in the investment vehicle, in which Naspers owns 43% and other shareholders 57%.
The cross-shareholding will end with Naspers and Prosus issuing new shares to shareholders without exercising their rights to those shares.
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