There is a much better defence for the R1.6bn of employment benefits received recently by Naspers CEO Bob Van Dijk than that only R32m so far has been taken in cash, as Naspers has argued so extraordinarily. Try telling Steinhoff or Facebook shareholders that they have not in fact made a loss until they cash out, or for that matter inform Naspers shareholders who have held on to their shares that they paid R300 a share for in early 2010, now worth over R3000, that they are not now much better off.
The defence I would make on behalf of Naspers managers is that the difference between the market value of Naspers and the market value of its stake in Tencent and other listed entities has narrowed sharply, to the clear benefit of Naspers shareholders. This difference between the value Naspers and the value of its stake in Tencent has been widening almost continuously since 2014 and was as much as R800bn in early 2018. It has recently however halved to about R400bn.
I would argue that such an improved rating in the market is to the credit of the Naspers managers. Clearly they have very little ability to influence the market value of its stake in Tencent, by far its most important asset. Were they to have done nothing but hold their 30% plus stake in Tencent, their shareholders would now be R400bn better off.
But the Naspers managers have done much more than this. They have undertaken a very active and ambitiously expensive investment programme. They have invested the growing flow of dividends they receive from Tencent into this programme and have raised much extra equity and debt capital in order to fund their investments.
Given the difference between the value of Naspers and the value of its listed assets (overwhelmingly Tencent) it is clear that the market place has a very poor regard for the ability of this investment programme to add value for shareholders. That is to say, to earn returns from it that will exceed the returns shareholders could realise for themselves if the cash derived from Tencent were distributed to them. And the extra equity or debt capital had not been raised on their behalf. The share market expects Naspers to lose rather than add value with its investments and ongoing business activity. Hence the company is valued at much less than the sum of its parts. But the value gap has closed significantly recentl,y for which management deserves credit.
The difference between the market value of its assets net of debts and the market value of Naspers itself can be attributed to one of three essential forces and judgments of them. Firstly, and surely the most important influence, is the expected net present value (NPV) of its investment programme. That is the market’s negative estimate of the difference between what the (large) sum of capital expected to be allocated and the value to shareholders these investments (however funded) are expected to deliver. All such estimations will be calculations of expected present values – that is estimates of cash out and cash expected to flow back to the company in the future, with all such flows discounted with the appropriate discount rate or cost of capital to repreasent the opportunity cost of the investments.
Ideally the expected NPV would have a positive value. In the case of Naspers, given the R400bn value gap, the estimated NPV can be presumed to register a large negative number. Though this pessimism about the value of the investment programme may not be the only drag on the market value of Naspers. The expected cost to shareholders of maintaining the Naspers head office – including the benefits provided to its CEO in cash or in shares or in options on shares – also reduces the value of a Naspers share- as it does for all companies.
A further factor adding to the gap between the sum of parts valuation and the market value of a holding company might be differences between the book or directors’ value attached to unlisted investments by the holding company and the market’s perhaps lower estimate of their value. Listing the assets and/or unbundling or disposing of them may prove that the market had been underestimating their value, and so help to close the value gap.
All these value adding or destroying activities (including deciding how much to reward themselves) are the responsibility of the senior managers and the directors of Naspers. It would appear that, in the opinion of the market place, their recent efforts in these regards have been more rewarding for shareholders, some R400bn worth. It’s the result, perhaps, of a more disciplined approach to allocating fresh capital that the market place has appreciated. It may reflect the more favourable market reaction to a more predictable, less dilutive approach taken by managers to rewarding themselves with additional shares. And also perhaps by a greater apparent willingness to list and sell off subsidiaries capable of standing on their own two feet.
We would suggest to Naspers that incentives provided for managers in the future be based upon one critical performance measure: closing the gap between the sum of parts value of Naspers, that is its NAV and its market value. Shareholders would surely appreciate such an alignment of interests. 30 July 2018
