Largest EU Consumer Internet Listing Narrows Discount, So Enter Now
Having only just completed a Spinoff in March (which has returned +30% to date), Naspers Ltd (NPN SJ) will perform another break-up next week with the listing of Prosus NV (PRX NA), the largest consumer internet business in Europe comprised mainly of NPN's 31% stake in Chinese internet giant Tencent. In a unique offering, NPN is allowing investors to elect not to receive Spinoff shares and instead increase their holding in the Parent, but our analysis shows benefits in participating in the Spin.The Edge Intelligence...
Not long after completing the Spinoff of its pay-TV business MultiChoice Group Ltd (MCG SJ) in March 2019, which unlocked ~$4bn for shareholders and realized returns of +30% to date, Naspers Ltd (NPN SJ) continues its quest to narrow its market cap discount to its significant Tencent Holdings Ltd (00700 HK) stake by announcing yet another Spinoff, now of its international (non-South African) portfolio holdings, the vast majority of which will consist of the aforementioned Tencent stake. The new company will be named Prosus NV (PRX NA) and will be primarily on the Euronext Amsterdam (Euronext NV) and a secondary listing on the Johannesburg Stock Exchange (JSE), with the first day of regular post-Spin trading on September 11, 2019. We believe the move to separate its international holdings came as positive news for shareholders, inferred by NPN’s share price gaining +10% to date since the announcement compared to the flat performance by the FTSE/JSE Top 40 (JTOPI) Index.
The Edge View...
We remain positive on NPN’s 27% distribution of its international portfolio holding in a bid to reduce the discount its shares trade relative to the value of its $129bn stake in Chinese internet giant Tencent. NPN ex-Spin will retain its local assets, which primarily include its Media segment, and a minimum 73% stake in PRX (please refer to page 4 in the analysis for details about the transaction structure), thereby leveraging on the potential upside of the Spinoff company. NPN’s (Combined) share price has been under long-term pressure from intermittent selling from many institutional investors in South Africa due to local rules limiting how much they can invest in a single stock. However, the upcoming divestiture is expected to reduce NPN’s outsized weighting on the JSE, which currently comprises 25% of the index.
We believe this will be beneficial for NPN (ex-Spin) as it will attract incremental demand from a broader range of global investors, giving more freedom to invest in the stock without having to worry about being forced to sell down shares and reduce exposure as the company's stock price rises. Additionally, shareholders will also benefit from the transfer of NPN’s entire debt ($3.3bn) to PRX while retaining $400m in cash. Lastly, we believe NPN may divest the negative growth Media business, which will further improve the overall valuation of the company.
On the other hand, PRX (which will hold assets including a 31% stake in Tencent) is going to be the largest consumer internet company in Europe and third largest in Amsterdam exchange by asset value. We are positive on PRX as its potential inclusion on key developed market indices after the listing will entice substantial new passive and active inflows, which is estimated to be more than $2bn according to the management, thereby further narrowing the discount. We also believe this will provide an opportunity to invest in the company’s portfolio of international internet assets for international investors who (for various reasons) were not previously able to access due to its previous listing on the JSE. Additionally, the debt load of $3.3bn is not worrisome for PRX, as it will also have $9.1bn in cash, translating into net cash of ~$5.8bn.
Therefore, this provides room for further expansion in quality tech companies down the line. Lastly, we believe PRX’s 100% exposure in OLX will be a game changer, as it turned profitable in FY19 for the first time and saw a rise of 29% in average revenue per user (ARPU) compared to FY18 and a staggering 64% rise compared to FY17, thereby constantly improving the monetization rate. Therefore, we believe this will supplement and unlock potential growth opportunities, further improving the overall valuation of the company.
Naspers and its operating subsidiaries, joint ventures and associated companies are engaged in the operation of pay television and the provision of related technologies, the operation of internet and instant messaging subscriber platforms, e-commerce platforms and the publishing, distribution and printing of magazines, newspapers and books. These activities are conducted primarily in South Africa, sub-Saharan Africa, China, Central and Eastern Europe, Russia, India and Brazil. Co. is organized into three business segments: Electronic media; Print media; and Corporate services.
The Edge Group - Global Fundamental Catalyst Investing. The Edge provides investors with access to hidden corporate value from Global Special Situations using a pioneering approach to investments. Founded in 2005 by fund management and investment banking professionals to provide high quality, private equity-level research on Global Corporate Divestitures for the benefit of fundamental event-driven, growth and value-oriented investors in this difficult to track, but proven investment space.
The Edge will look to screen and analyze include Spinoffs; Reverse Morris Trusts; Squeeze Outs; Privatizations; Demutualization; Deep Discounted; Rights Issues; Rights Offering; Restructuring; Insider Purchases / Buying Change of Management / CEO Change; Deteriorating fundamentals; Post-Bankruptcy; Reorganization; Tender Offer; M&A Deals; Secondary Offering; Share Swap; Thrift Conversions; Share Buybacks; Activist; Mergers. All analyzed from a fundamental point of view.
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