Another plan to remove Naspers, Prosus discount

Prosus and Naspers surprised shareholders with a proposed restructuring in an effort to reduce the discount to net asset value between Naspers and Prosus, as well as unlock some of the perceived value in Prosus.

In short, a share swap between Prosus and Naspers will see Prosus effectively buying a large stake in its holding company Naspers. The announcement of the proposed transaction implies that the share swap will remove some limits that fund managers might have to invest in both Naspers and Prosus shares, allowing them to increase their holdings, presumably at higher prices.

Prosus is making an offer to Naspers shareholders to acquire a 45.4% interest in Naspers. The announcement says that the transaction will increase Prosus’s interest in Naspers to 49.5%, disclosing that Prosus already owns a few percent of Naspers.

Comparing the situation before the proposed deal with the result, shows that it looks good for Prosus. Naspers is trading way below its net asset value (NAV) – with its 73.2% interest in Prosus making up most of the NAV.

Thus, by increasing its stake in Naspers, Prosus is planning to indirectly acquire its own shares and pay for them using its own shares. How the moving of the deck chairs will unlock value for inter alia Naspers and Prosus shareholders depends on the ratio Prosus management and their corporate advisors recommended for the share swap.

The proposed offer is higher than the Naspers share price to eliminate some of the discount to NAV, but lower that the full NAV to make it attractive to Prosus.

Prosus is offering Naspers 2.27443 Prosus shares for every one Naspers share. The initial announcement of the offer states that 72.6% of the value that will be unlocked will go to Naspers shareholders, while Prosus will get 27.4% by still acquiring the Naspers shares under the full NAV.

In addition, the proposed transaction is expected to more than double the free float of shares available to investors which management believes will unlock value for both Naspers and Prosus shareholders.

The announcement states that Naspers has a long history of value creation that led to the rapid growth of the group, increasing Naspers’s market capitalisation to nearly 26% of the value of the JSE Shareholder Weighted Index (SWIX) towards the end of 2019, leading to the creation and separate listing of Prosus.

At the time, management pointed out that many South African-based investors have single share limits and mandate restrictions, which led to forced selling of Naspers shares and it not reflecting the true value of the shares. The Prosus listing helped for a while, but continued growth in Prosus against the rise in value of other companies on the JSE saw Naspers rise sharply again, putting it in the same situation as a few years ago. The proposed transaction is designed to correct this.

The transaction is also expected to increase the Prosus free float materially and increase its overall trading liquidity, market index weightings and positive trading dynamics, according to the announcement.

Management stated that the deal would immediately increase Prosus’s free float to more than $100 billion, making it one of the 20 biggest companies listed in Europe. It would be also be included in the STOXX 50 index in Europe, and in most fund managers’ portfolios. Better liquidity will hopefully also reduce the Prosus discount to its underlying assets, largely Tencent.

Unfortunately, the transaction will once again result in an acceleration of capital gains tax (CGT) for Naspers shareholders in SA. The tax authorities will see it as a sale of Naspers shares and a purchase of Prosus shares and any profit on the Naspers investment will be liable for CGT.

It is expected that the transaction will be finalised within the next few months, provided that shareholders and regulators approve the details of the  transaction.

Read the full Sens announcement here.