“The investment strategy at the time was to find a replacement revenue source for its traditional print media business – which it forecast would decline in the advent of digital media”
That’s a quote from an article describing Naspers, a South African media company, in the 1980s. Koos Bekker – now the Chairman – had suggested that there was potential for a new type of pay TV in South Africa, similar to HBO.
The narrative is immediately familiar. A media company tries to branch out to digital media in order to make up for the shortfall in print. But this is not that kind of story. Instead of cautiously investing a little on the side, Naspers transformed themselves from a legacy media company to one of the most interesting and prominent internet investors in the world.
What makes the story about Naspers even more interesting is that their transformation wasn’t solely driven by clarity of vision. It was – and is – driven by necessity after having hit the investment equivalent of winning the Powerball – their investment in Tencent in 2001. But having an unbelievably successful investment as a listed company is a double edged sword. Naspers’ journey has been both complicated and has led to some extraordinary secondary effects.
Let me explain what I mean. But first, a little background.
A brief history of Naspers
Naspers was founded in South Africa 1915 as a newspaper and magazine publisher. They later added book publishing, and in the 1980s also pay-TV through M-Net. Their original name was De Nasionale Pers Beperkt, and as the name implies they were nationalists – Afrikaner nationalists more specifically.
As expected when running a predominantly white media company in South Africa in the mid to late 1900s, Naspers has a questionable political past. They were supporters of apartheid in various ways, and did not formally apologize for their role in this matter until 2015. Too little, too late, of course. More on this dark history here.
In the 1990s, the company changed its name to Naspers and listed itself on the Johannesburg Stock Exchange. By then, the TV operations contained a spinout from M-Net, now called Multichoice – a subsaharan provider of pay-TV and sports programming. But still, all in all, very much a traditional media company with newspapers, books, magazines and television.
This is where it starts to get interesting. Naspers had started to diversify, which among other things meant some investing in China and other foreign markets. However, the crash in 2001 forced the company to make a lot of write-offs – among the Chinese activities in particular. They lost hundreds of millions of dollars in total, and about $100 million in China alone. But the CEO at the time – Koos Bekker – still managed to leave the market with one, valuable asset.
* The Harbinger, in 2017, lists the stake at 49% but most sources reference 46,5%
As they were leaving Beijing, Bekker was approached by two young men who had started an internet operation called Tencent, which was already signing up users at a remarkable pace. Against the decision to withdraw, Bekker took a gamble on 49% (sic*) of their company.
This was the turning point – when the South African media company started to become a global internet company.
The Tencent investment
Bekker bought 46.5% of Tencent for just $32 million in 2001. 18 years later, in 2019, their stake – after IPO dilution – had grown to $133 billion. An almost unbelievable return, and likely one of the best investments of all time. In 2018 they sold 2% of their Tencent stake, and netted $9.8 billion.
But while the shareholders were happy with the return of their Chinese investment, their trust in what else Naspers was doing seemed to erode. In 2012, 80% of Naspers stock price was based on their stake in Tencent and another 10% on their holding in Mail.ru. That meant that all other activity in the company was valued at only 10% of the total stock price. It also meant that the dependency on Tencent was immense. And with it, a perceived high volatility. Investors were asking themselves: what will happen to Naspers, if Tencent falls?
Being lucky with an individual investment can be a blessing and a curse. In this case, the outlier investment in Tencent forced the management team to start differentiating even further, and much more aggressively. Naspers started to invest a lot into other internet companies – predominantly in emerging markets. Remember – they had already done this once and lost hundreds of millions of dollars about ten years earlier. So this move took some courage. But this time it was a defensive move rather than an offensive one. If the media assets that they owned weren’t going to rebalance the stock volatility – something else had to it. And the bet was that one or several of these new internet companies might do the trick.
The investment era begins
From around 2007 and still to this day, there has been an immense activity in investment and M&A from the South African giant.
Here’s a selection of the e-commerce transactions that they’ve been part of:
These are big deals. There aren’t that many companies in the world that are involved at these levels. And what’s more – note that this was just five of their transactions, in one single category (e-commerce). The complete list is too long to list, but Crunchbase has a longer version for those of you that are especially curious. And below is a little bonus reading about each respective deal mentioned above.
|BuscaPé||Acquisition + Divestment|
|Markafoni||Investment + Acquisition|
|Flipkart||Investment + Divestment|
|Souq||Investment + Divestment|
|Takealot||Investment + Acquisition|
The dawn of Prosus
As you can tell already, Naspers is quite complicated to analyze. Reading this above, one might ask oneself:
– Is this a media company, like Bertelsmann?
– Is this an internet investment company, like IAC?
– Is this a holding vehicle for Tencent shares, like Altaba was to Alibaba?
The answer to all these questions is basically “yes“. But that’s not very helpful in terms of analysis of course. Naspers acknowledged this.
On top of this confusion, Naspers also had – and still has – a structural disadvantage in that they primarily trade on the JSE – the Johannesburg Stock Exchange. This is troublesome for several reasons, but partly because the South African currency, the Rand, is among the most volatile currencies in the world. The currency risk alone is enough to put many investors off. Also, Naspers size compared to the JSE at large was a becoming an issue. And then you have the complexity to analyze and understand the company overall too.
The solution to this was to restructure the business entirely. It was done in 2019, and this is where Prosus first enters the terminology. The process started by spinning out Multichoice, the entire TV- and cable business, to it’s own listing on the JSE. This made the actual media part of this former media company very small. In fact, it represented just 1.7% of revenues in 2019.
Next was to separate Takealot – probably because it is a South African marketplace which makes sense to have listed together with Naspers in their home market.
And then finally – the creation of Prosus, a new company which listed on Euronext Amsterdam in September of 2019. Prosus consists of all of their internet investments, including the 31.1% stake in Tencent. Naspers holds around 73% of Prosus shares, while 27% are floated.
I made a graphic to explain what the relationship looks like, as of February 19, 2020:
As you can see, the Tencent stake represents more than 100% of EBITDA. It’s fair to say that the dependency on this one holding is still very substantial.
Naspers strategy in 2020
Naspers today focuses on the following eight areas:
Let’s look at each of them briefly:
- Classifieds – relatively well consolidated and an established business. Now profitable as a whole too. My prediction that they will acquire Adevinta still stands.
- E-Commerce – largely a local South African play, and not an area for further expansion given that they have divested Flipkart and Souq.
- Food Delivery – has similar market dynamics to classifieds in that it is also a marketplace, but a more underdeveloped one. This one will be costly and require more consolidation before it shows a profit.
- Media – a shrinking business that is going to be difficult to divest due to the lack of buyers. I wouldn’t be surprised if these assets were placed in an independent trust instead of run through the operations.
- Payments & Fintech – largely a supplemental business to the marketplaces. Having access to massive consumer groups is a great way to launch new payments brands, as well as the additional margin on each purchase.
- Social & Internet Platforms – this consists of the holdings in Tencent and Mail.ru.
- Travel – a merger created an ownership stake in a listed Indian travel company called MakeMyTrip. No other activity in the space.
- Ventures – seems largely opportunistic and a way of identifying new growth areas in the market.
Cursed by success
If the main point of Naspers’ additional investments and acquisition was to diversify from Tencent, how has that worked out? Well, it turns out it is hard to catch up with success. This is how the Tencent stock has performed since it’s IPO:
As of February 17, 2020, Tencent’s market cap is $510.358 billion. The 31.1% ownership that Prosus owns should subsequently be worth ≈ $158.7 billion. However, the total market cap of Prosus is currently at $126.7 billion. The value of the Tencent stake still eclipses the value of the entire company.
This puts Naspers in a familiar position. On the one hand, the performance of Tencent has been incredibly successful – more so then anyone could have imagine. On the other hand, all their other investments and acquisitions still haven’t convinced the stock market that they are worth while. It must be slightly ungrateful to be one of the largest internet investors in the world, and still see your entire portfolio be considered a rounding error in overall valuation of the company. The volatility of the stock remains, and the dependency on Tencent too.
So, why doesn’t the market value Naspers and Prosus higher then? It’s always hard to explain why the market does what it does. In general, investment companies often trade at less than their net asset value, but Naspers discount has been unusually high. Some have raised concerns about the tax liability that selling the Tencent stock could induce, and others have referenced the political instability – including currency risk – that Naspers has in South Africa. These factors could play in, but the market is often not as rational as it is made out to be.
All in all, the fundamental question is: can Naspers do it again? If they have anything in their current portfolio that has close to the development that their one lucky break in China has had, then the tables could quickly turn and the market could start looking at them differently.
Naspers has spent the past 20 years trying to diversify themselves. But no one knows the double edged sword of success like they do. The very success that put them where they are today, is the very thing that is holding them back. The world’s most interesting – and underrated – internet investor in the world, that almost no one has heard of.
Disclaimer: This should not be considered investment advice, and I do not hold any stock positions in Naspers, Prosus, or Tencent.
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