Sell, buy, sell, buy
When South African investment company Naspers spun out its internet assets as Amsterdam-listed Prosus their stocks traded at discounts to NAV of 36.8% and 16%, respectively. In the first half of 2022 the discounts widened dramatically to 64.4% and 54.1%, and “something drastic” needed to be done, as one of those involved put it.
Prosus was the largest shareholder in Chinese internet giant Tencent with a stake valued in June at US$125bn and this holding provided the means to reduce the NAV discount.
The solution was conceptually simple – sell shares in Tencent through an at-the-market programme to fund buybacks at Prosus and Naspers – though execution was complicated with four synchronised steps across continents and exchanges, including Hong Kong where ATMs (also known as dribble-outs) are not established.
The NAV discounts would decrease by Prosus and Naspers reducing their outstanding stock and also because the Naspers and Prosus portfolios would be less heavily weighted to a single asset.
The ongoing programme has four legs – Prosus dribbling out Tencent shares into the market, then using proceeds to fund buybacks by Prosus. Simultaneously Naspers dribbles out Prosus shares into the market and uses proceeds to fund its own buyback.
Progress in dribbling out Tencent shares into the market determines the speed of everything that follows. The buybacks by Prosus and Naspers' sales of the same stock have to be closely controlled to maintain the South African company’s holding in its Dutch arm.
Results were seen immediately, with the discount to NAV falling by eight percentage points on both stocks upon announcement in June, and by late October the Naspers discount was 51.1% and for Prosus it was 41.9%.
Unusually there is no clear end point, with the programmes to run until management finds the discounts for Naspers and Prosus acceptable. The expected annual volume across the four legs is around US$29bn and a company presentation in December projected the NAV accretion were the programmes to run for three years.
Naspers and Prosus CEO Bob van Dijk said on a results conference call in November "... as valuations have dropped globally, we have aggressively repurchased shares. I'm very comfortable continuing to do this as long as our assets trade at a significant discount".
Goldman Sachs and Morgan Stanley are executing all the programmes. The complexity of managing the various parts means the banks have opted to take it in turns, with Goldman active one week and Morgan Stanley the next.
As of January 4, more than US$7.2bn of Tencent shares had been sold and US$1.4bn of Prosus shares.
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