STUART THEOBALD: Naspers and Prosus are a strange dish indeed

The idea of control vested in an anonymous structure is diabolical.

This column first appeared in Business Day. 

It is hard to fathom the contempt with which Naspers, and now its alter ego Prosus, treats minority shareholders.

Consider that Naspers is controlled through unlisted A shares that have 69% of the voting power despite having a fraction of the economic interest. Consider too that no-one knows exactly who controls those A shares. Chair and former CEO Koos Bekker and fellow executive Cobus Stofberg control some, Sanlam others, but the holders of the majority are unknown; there are more than 5,000 shareholders via intermediary entities, according to Naspers.

This is, to my mind, the most astounding example of poor governance in any big company in the world. Differential voting right control structures are sometime tolerable when they endow a widely respected founder or other individual with control (for instance Google is controlled by founders Larry Page and Sergey Brin despite having a minority economic interest), but the idea of control vested in an anonymous structure is diabolical.

If this wasn’t bad enough, in 2019 Naspers vastly complicated things by setting up Prosus, listed in Amsterdam, as its holding company for its internet assets (particularly the crown jewel, its 29% interest in Tencent). Prosus had a slightly different share class structure; it too had N and A shares, and they have equal voting rights. But before you conclude that made Prosus less worse than Naspers, built into Prosus’ articles of association is another share class: A2 shares that have 1,000 times the voting rights of the N and A shares. The A shares convert into these A2 shares if Naspers ever loses control of Prosus. This means that the same opaque interests in Naspers also have control of Prosus, even if Naspers’s interest in Prosus falls below half.

The next move in this Byzantine restructuring happened earlier this month when Prosus acquired Naspers shares by issuing Naspers shareholders with Prosus shares (in various classes). Thanks to the control structure, this deal was forced through, despite some vociferous opposition from ordinary shareholders. At the Prosus general meeting to approve the offer, 90% of shareholders there voted for it. But consider that once you take out the Naspers votes (it held 75% of Prosus), almost half of Prosus minorities voted against it. Those minorities include group executives and other related parties — so I think it is safe to say the majority of genuinely independent minorities were opposed. Also, within Naspers, the minorities were given no voice — the A shareholders simply made it happen. But a group of 35 institutional investors in SA wrote a strongly worded letter to the Naspers board to voice their opposition.

The result of all this is that Prosus now owns 49% of Naspers, and Naspers owns 56% of Prosus (though 72% of the voting rights thanks to the creation of a new share class). This structure is purported to be an advance in efforts to unlock the discount to net asset value that Naspers (and now Prosus) have long traded at. The company argues that is partly because Naspers is so large on the JSE that investors are reluctant to buy because of the concentration limits they face. That problem has been substantially lessened by the poor performance of the share price during the period. Naspers is down about 35% since its February highs. That weakness is largely because of regulatory woes in China affecting Tencent, but no doubt Naspers governance high jinks will have lost it market respect.

Minorities made their discomfort clear too in last week’s Naspers AGM; 66% rejected the group’s remuneration policy and its implementation while 85% refused to grant directors the right to issue unissued shares. But how did the all important A shareholders vote? Well, 100% were in favour of every one of the 11 resolutions tabled. So, they all sailed through.

What is really going on here? The answer has a lot to do with the intentions of those A shareholders, which are, of course, hard to discern. It is clearly being driven by the Tencent stake, which despite recent tarnishing is still worth a whopping R2.5-trillion, considerably more than the R1-trillion market capitalisation of Naspers, even though it holds 56% of the company that holds that stake. The obvious thing to do if you want to reduce that discount is to unbundle the Tencent shares, but Naspers directors have steadfastly refused to do so.

Perhaps those A shareholders are wanting to get their hands on that value outside the SA exchange control and tax net. A remarkable feature of all the transactions that have happened is that little tax has arisen requiring payment to the SA Revenue Service. The end game may be for A shareholders to flip completely into Prosus, offshoring their assets. At that point, the Tencent interest can be unbundled with minimal tax consequences.

The route there is complex. But a crazy cross-shareholding structure may be a good step in the process of one day convincing regulators (including the SA Reserve Bank and National Treasury) to simply allow Prosus to complete a reverse takeover of Naspers. Watch this space.

• Theobald is chair of research-led consulting company Intellidex