Getting a 50% discount is not such an unavoidable opportunity when the discounts are never over.
Prosus is one of the most valuable publicly traded technology companies in Europe due to its large stake in Chinese internet giant Tencent, which was bought two decades ago for $ 34 million and is now worth $ 216 billion even after two stock sales. The Amsterdam-based company also owns a portfolio of e-commerce startups that, like Tencent, have mostly been successful during the pandemic. Prosus first announced an estimate from Deloitte on their valuation on Monday. According to the accounting firm, they’re valued at $ 39 billion, down from about $ 20 billion a year ago.
Strong valuation is a double-edged sword. It suggests Prosus’ businesses are headed in the right direction, but it also painfully exposes the gap between their value and their share price. Adding the $ 39 billion to the $ 216 billion for Tencent’s stake, about $ 1 billion for a similar minority stake in Russian internet company Mail.ru, and nearly $ 12 billion in net cash, you get an implied equity value of $ 268 billion for Prosus. Its market cap is only $ 162 billion – a discount of 39%.
The gap widens as you move up the chain of ownership. Prosus is majority owned by the South African holding company Naspers,
whose shares are trading around 23% below the value of their Prosus stake. Overall, Naspers shareholders receive less than half the value of Prosus’ internet businesses and holdings.
Such financial inefficiency could be an opportunity if the reasons weren’t so persistent. Naspers, who built the portfolio, hived off Prosus to reduce its own heavy weighting in the South African stock market, which gave the portfolio managers a persistent technical reason to sell its stock. Less than two years later, Naspers is as dominant on the stock market as ever.
Prosus and Naspers have a new plan to solve the problem that includes an overarching ownership structure that will result in Prosus owning nearly half of Naspers. The project was rejected by investors in part because of its complexity, forcing the company to take a public defense. Shareholders will vote on the deal next month.
Complexity may itself be a reason for the discount problem at Naspers and Prosus: tying yourself into knots to answer a question just raises more. The only real solution is a split, but companies need their Tencent stock to fund bets on cashless industries like grocery delivery. They grossed $ 14.6 billion by selling just 2% in April.
Naspers and Prosus have attractive portfolios, but investors can’t expect the current strategy to deliver anywhere near full value.
Write to Stephen Wilmot at email@example.com
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Published in the print edition of June 22, 2021.