South Africa’s top asset managers have joined forces against the complex shareholding structure and lack of management alignment at Naspers and Prosus.
The Naspers executive team, led by chief executive Bob van Dijk, has been under scrutiny by market participants for several years.
The discount in its share price to its investment in Chinese tech titan Tencent has widened following several unsuccessful corporate actions.
In the email below, addressed to Koos Bekker and Hendrik Du Toit – Naspers non-executive director and chief executive of NinetyOne – the investors outline their concerns.
Many of the problems, the asset managers say, have only got worse since Van Dijk’s appointment as Naspers CEO.
To get more insight into the matter, Biznews founder Alec Hogg talked to four Naspers and Prosus investors:
- Anthony Sedgwick – Director at Abax Investments
- Shane Watkins – CIO of All Weather Capital
- Asief Mohammed – CIO Aeon Investment Managers
- Delphine Govender – CEO of Perpetua Investment Managers
The discussion is embedded below.
Here is the full email from the asset managers to Koos Bekker and Hendrik Du Toit.
Background to collective engagement
We, the undersigned co-signatories, are a group of 36 asset managers and investors, who collectively represent total assets under our management of more than R3.6trn. The investor grouping included here represents clients who are Prosus (PRX) shareholders; Naspers (NPN) shareholders; shareholders in both entities, and potential shareholders. We have noted the PRX voluntary share exchange offer for NPN shares, as initially announced on 12 May 2021 in a joint announcement by PRX and NPN.
We, as a collective, find several aspects of the proposed transaction problematic. We are of the view that it introduces elements which serve to increase complexity in the overall company structures, thereby reducing the likelihood of further value unlock, whether immediate or longer-term. Given that many of us have already expressed these in-principle reservations to the executive management team but have been unable to obtain clear understanding for how these views are being heard, we now wish to escalate our commonly held concerns through this collaborative letter of engagement directly with the non-executive directors of NPN and PRX.
Our foundational reservations are governance-related, namely:
Complexity and cross-shareholding:
- The proposed transaction increases the complexity within the PRX/NPN overall structure in its execution and its outcome, and in our view appears unlikely to address the net asset value (NAV) discounts that such complexity invokes in the longer term.
- There is a lack of visibility over what the next steps flowing from this transaction might be that could potentially trigger further value unlock. We believe that the weak share price reaction and widening of the NAV discounts of both companies subsequent to the announcement of the proposed transaction reflect this most disappointing reality.
- As a matter of principle, we are of the view and experience that the introduction of cross- shareholdings between two companies inhibits subsequent corporate restructuring and defers the potential unlock of trapped value. It would be unique for this instance to result in the opposite.
- We are concerned about possible misalignment in management incentives that could result in the discount between NPN and PRX widening further given the fact that, pursuant to this transaction, it appears management’s incentives are now more aligned with PRX versus NPN.
- We re-iterate previous concerns raised individually, that the management incentives in PRX are dominated by the performance of Tencent and are not sufficiently connected to the unlisted companies within PRX. This reduces alignment between management’s decisions in respect of the unlisted components and how their own capital allocation decisions are ultimately accounted for and assessed. We believe that this misalignment is not addressed in this proposed transaction and therefore continues to contribute in part to the lack of value attributed by the market to these unlisted investments.
In addition to these core matters, we also point out concerns over the more commercially based aspects of the proposed transaction, including the exchange ratio in respect of the NPN share offer and the future potential tax liabilities.
We therefore wish to place on record the following points through this escalated collaborative engagement:
- We wish to emphasise that there is a broad spectrum of dissatisfaction with the shareholder options that arise from the proposed transaction as contained in the transaction circular in its current form.
- We believe that this complex transaction, while described by management as the “best solution” on the table, results in what we believe are worsening governance outcomes which will do very little to reduce the substantial discounts within NPN and PRX and could even widen them. We believe proceeding with this transaction in its current form despite the express reservations of such a large contingent of shareholders would significantly undermine NPN and PRX governance undertakings.
- We wish to gain assurance from the non-executive directors about how the NPN and PRX Boards plan to tangibly address the way in which evidently misaligned management incentives are going to be resolved, with an acknowledgement that this is contributing to parts of the discounts.
We believe, as investors who all exercise stewardship responsibilities in respect of our clients’/members’ capital, that it is incumbent on us to make every effort to constructively place common concerns on record with the front-line custodians of those investments. Despite the individual efforts of select investors in this group to address several concerns with the executive management team, we are now collectively approaching the non-executive directors of the respective Boards directly.
While this collective engagement provides the investor grouping with a platform to express important, commonly shared concerns using a collective voice, each asset manager/investor reserves the option to engage with you separately on their reservations in respect of the voluntary share exchange offer and in general. Investors within this grouping would be willing to constructively and humbly put forward alternative solutions that could be considered both in terms of the current proposed transaction and/or in terms of the broader corporate structures.
Naspers and Prosus N.V. (“Prosus”) thank shareholders for constructive engagements since they announced a proposed voluntary share exchange offer by Prosus to Naspers shareholders. We are aligned with shareholders in our joint desire to maximise the value of the group. We plan to achieve this by building useful consumer internet businesses with global reach over the long term. We remain committed, and management is incentivised, to continue to take action to address the discount to NAV.
In the interest of ongoing transparency, we want to clarify our perspective on two topics that have been raised in our engagements with shareholders:
Complexity of the proposed transaction
We agree that we must avoid friction due to complexity. After extensive work, a structure was found that makes the end state of the transaction straightforward, through the cross-holding arrangement, with dividend flows clear and certain. We encourage investors to review this arrangement.
Alignment of management and shareholder interests
We fully concur that management and shareholder interests must be aligned.
All of management PSU and share option incentives today are in Naspers. These components represent the vast majority of their compensation. As we move forward it is necessary to include Prosus options and PSUs to reflect the interests of all shareholders. In our integrated annual report (to follow in a few weeks) you will see that the intention for future allocation of long term incentives for the executive directors is to align them with Naspers and Prosus shareholders’ free float interests as a reference (currently 72,5% Naspers, 27,5% Prosus). Nonetheless, the Naspers component of the incentive will continue to be the most significant component of management compensation for many years to come. Our executive directors commit that they will not exercise their vested Naspers share options, which is where they have most of their wealth tied up, prior to the exchange offer.
The board remains committed, and management is incentivised, to continue to take action to address the discount to NAV in the future and the proposed transaction maintains our flexibility to do so.
We believe that the proposed transaction is in the best interests of Naspers and Prosus shareholders:
- It could provide significant value unlock for Prosus and Naspers shareholders. It will increase the Prosus free float materially, with expected growth in its overall trading liquidity, market index weightings and positive trading dynamics. It will relieve pressure resulting from the too-large size of Naspers on the JSE, which we believe has inhibited Naspers’s market valuation.
- The exchange ratio is equitable, sharing the value created by the transaction according to the current underlying ownership of the Prosus NAV, which is 72.5% Naspers and 27.5% Prosus.
- This action follows the successful prior action of listing Prosus on the Euronext Amsterdam exchange. That helped reduce Naspers’s size on the JSE and resulted in net Foreign Direct Investment inflows into Naspers.
- The group has has a track record of consistent value creation and over the past decade, investments in the group’s e-commerce businesses have delivered a rate of return above 20%. The track record is well placed to continue and its value will be more adequately realised in the Group’s post transaction structure. In the first half of the year, Group revenue and profit growth accelerated meaningfully and, as is evidenced in the Group’s trading statements published today, operational gains have continued into the second half of the year. These figures will be updated during our next results presentation on 21 June.
Prosus shareholders are asked to vote on the transaction at the EGM on July 9 2021.
We intend to provide further updates over time.