Prosus went back on its word not to sell more of Tencent’s stock for three years, saying on Monday it needs the money to fund a share buyback programme, sending its shares skyrocketing as much as 25%.
The open-ended, long-term programme, the size of which was not disclosed, is the latest attempt by Prosus, alongside parent Naspers, to crush a stubbornly wide gap between their market capitalisation and the value of their underlying assets.
The sale in small chunks of Prosus’s 29% stake in Tencent, worth more than R2.1-trillion, amounts to a change in attitude for the Amsterdam-listed internet behemoth, which pledged almost a year ago that it would not sell any more stock in Tencent until at least 2024.
But the discount to the sum of its parts that Prosus said has reached "unacceptable levels" and pressure from investors forced management led by Bob van Dijk to change tack.
"The discount is elevated now and shareholders have asked for this, so therefore we’re doing it. "I think this action, over time, should help. And if markets recover, that benefit will be even greater," group CFO Basil Sgourdos told Business Day.
In response, shares of Naspers were 23% higher at R2,348 — booking their biggest one-day gain since 1999 and closing above R2,000 for the first time since early February. Prosus had its second-biggest day on record, jumping more than 18% to R1,039, valuing it at about R2.2-trillion.
Together, the duo added more than R500bn to their market capitalisations.
Even with the share price jump in Prosus, it still owes its valuation to Tencent despite having other assets, including some of the fastest-growing e-commerce platforms in the world from classifieds sites and food delivery apps to travel booking and online education websites. On June 24, Prosus had a net asset value of $174bn (R2.75-trillion).
The announcement of the share buyback programme is tinged with pain as Prosus would most likely sell shares in Tencent that have lost almost half their value since a 2021 peak. It has been hit by the Chinese government’s widening regulatory campaign against the vast technology sector.
Still, repurchasing its own stock, as well as of parent Naspers, in the coming weeks would reduce the cost of funding the programme. Its share pricehas been plunging alongside global tech peers due partly to a lower risk appetite for equities in the wake of Russia’s invasion of Ukraine.
If the group had waited for markets to recover, the net return would not be as high for shareholders, Sgourdos said.
"So, it’s the elevated discount that creates the net return opportunity," he said.
Analysts appear to be supportive of the surprise move, which adds to a series of steps — such as listing Prosus in Amsterdam and spinning off MultiChoice — Van Dijk has undertaken since he took the helm in 2014 to fix the financial inefficiency.
"Effectively, Prosus will be selling a portion of its largest asset and then buying it back at half the price," said Renier de Bruyn, senior equity analyst at Sanlam Private Wealth.
Peter Takaendesa, head of equities at Mergence Investment Managers, said this move opened up more opportunities for Van Dijk to close the value gap. "While operational challenges are likely to remain in most of their operations over the mid-term, the Naspers and Prosus board has a clear opportunity to implement more measures that would continue to narrow the deep discounts the shares are trading at."
In addition to the buybacks, "improving the profitability of the e-commerce operations and further simplification of the cross-holding structures could be additional measures to sustainably narrow the discounts further", he said.
Tencent is supportive of the withdrawal by Prosus of its voluntary restriction, Naspers said, adding that the number of Tencent shares to be sold per day would be a small percentage of average daily traded volumes.
Van Dijk said this action "will also rebalance our asset base towards our fast-growing non-Tencent assets, whose value we expect to increase over time, while retaining exposure to Tencent’s significant value creation potential".
Update: June 27 2022
This article has been updated to reflect the share reaction of Naspers and Prosus.
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