July 3, 2017 / 4:32 AM / a month ago

Naspers' addiction to Tencent is unhealthy

Mascots of Tencent are displayed at a registration counter during a news conference announcing the company's results in Hong Kong, China March 22, 2017.Tyrone Siu

HONG KONG (Reuters) - Naspers has an unhealthy addiction to Tencent. The South African company is worth $28 billion less than its stake in the Chinese gaming behemoth. Boss Bob van Dijk rules out a spinoff, but that would be the best fix. Unfortunately for would-be activists, supervoting shares make it hard to apply pressure.

Fuelled by an early bet on Tencent, the tech and media group has become South Africa's largest public company by market value. The problem is, Naspers' other investments, which span e-commerce in India to online classifieds in Poland, are effectively worth less than nothing to shareholders. As of June 30, the one-third stake in Hong Kong-listed Tencent was worth roughly $113 billion - a third more than Naspers.

Graphic: Naspers is worth less than its one third stake in gaming giant Tencent: tmsnrt.rs/2tGMaKc

The situation echoes the dilemma at Yahoo, where its core business ended up being worth a lot less than its stakes in Alibaba and Yahoo Japan. Yahoo fixed that by selling the internet business to Verizon and rebranding as Altaba.

Naspers’ discount has more than tripled over the past year partly due to Tencent's surging share price. That has prompted some investors to speak out. Last month, a Geneva-based shareholder published an open letter, urging a spinoff, among other things. The company rules out any sale or unbundling of the stake, saying Tencent is "an appreciating asset" that is core to its strategy.

The activist has a point. At best, the market is now applying a big “conglomerate discount” in valuing Naspers. That could prove enduring. At worst, investors are sceptical that the company is creating value with its other businesses. Last month, the company said annual operating losses at its e-commerce division, which includes bets on classifieds, payments and food delivery, widened to $682 million from $648 million. Smaller pay-television and media arms also disappointed, as operating profit slumped by over one-third.

    Unfortunately, supervoting shares account for 68 percent of votes at Naspers, recent filings show. It is not clear who ultimately owns these shares. But if these owners support management, it can easily continue to be dismissive.

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