Thread by @MaanoMadima

Foreign Direct Investment flows to South Africa increased to $41 billion in 2021 from $3 billion in 2020 largely driven by the share swap between Naspers and ita majority-owned subsidiary Prosus.

Who is Prosus and why did Naspers embark on the share swap?

[Thread]

When Naspers coughs, the entire JSE catches a cold.

The JSE had record trading volumes on 17 Aug 2021 and of the R148bn traded, Naspers and Prosus accounted for R125bn in value.

Naspers’s size on the JSE was 25.9% the JSE Shareholder Weighted Index in 2019 and 23.3% in 2021.

In 2019, Naspers decided to unbundle all of its internet interests outside of South Africa including the famous Tencent stake into a new company which was called Prosus.

Prosus got a primary listing on Euronext Amsterdam and a secondary listing on the JSE.

Naspers held 73.2%.

Prosus is a top 12 global consumer internet company.

Before the creation of Prosus, Naspers's size on the JSE was 25.9% of the JSE Shareholder Weighted Index (SWIX) which had become untenable.

Post listing it ⬇️ to 18.4%
of the SWIX but ⬆️ to 23.3% as at Apr 2021.

Valuation of Tencent created a serious headache for Naspers.

Naspers sought to fight the gap between its market value and the sum of its parts (Naspers' shares trade at a substantial discount to the value of its underlying investments).

Listing of Prosus didn't help.

Trading at a discount to the sum-of-the-parts is common for holding companies

When entity trades at discount to NAV,it means if investors were to hold individual positions in entity's underlying assets,they would be worth more than holding shares in parent that owns those assets

What 'complicates' things with holding companies that have unlisted investments is the difficulty in valuing those unlisted investments (lack of proper disclosure).

Valuing listed investments within holding companies (Remgro) is often easier than valuing unlisted investments.

There is a clear correlation between Naspers’s increasing size on the JSE and the growth in the discount.

Prior to Prosus listing, Naspers traded at a discount to NAV of 35%-40%, and has averaged 50% post listing.

Prosus trades at an average discount to NAV of just below 34%.

Naspers’s 2001 acquisition of a 46.5% stake in Tencent for a mere lousy $32m is the greatest investment by a SA company and is valued at $221bn.

H1 2021, Prosus sold 2% of Tencent and generated proceeds of $14.6bn.

Prosus ⬇️ to 28.9% and won't sell again in the next 3 years.

Market participants have previously suggested that in order for Naspers to close the gap, it should unbundle Prosus’s stake in Tencent to its shareholders, but Naspers has previously cited both strategy and potential huge tax bills as reasons why an unbundling won't work.

So what did Naspers and Prosus do?

A complex financial engineering took place in 2021.

Prosus decided that it will acquire 45.33% of Naspers N Shares of Naspers which owned 73.2% of Prosus in exchange for its own shares.

Prosus would get a 49.5% economic interest in Naspers.

Prosus acquired 45.4% (197.5 million) of the issued Naspers N ordinary shares and Prosus issued, 449.3 million new Prosus ordinary shares N to tendering Naspers N shareholders.

This increased the number of issued Prosus ordinary shares N to 2,062 million

How was Naspers’ shareholding of Prosus affected by the transaction?

Naspers’ stake in Prosus decreased to 57.2% of issued Prosus N Shares
down from 73.2%.

A Cross-Holding Structure was created.

Naspers owned 73.2% of Prosus with a 26.8% free float (a financial measure that represents the % of shares of a listed company that can be freely traded).

Post the complex deal, Prosus free float ⬆️ to 42.8% ($100bn) due to Naspers only owning 57.2% of Prosus.

What are the consequences of a free float?

A higher free float often means that the share will become more liquid allowing more investors to buy it.

Prosus now owns 49.5% of Naspers reducing its free float (giving Naspers' holders less access to returns generated from Tencent).

The proposed transaction was expected to generate between R3.8bn and R5.8bn of tax revenues for South Africa.

Prosus spent R2.1bn ($144m) in transaction fees to get this transaction over the line.

In FY20 Naspers contributed an estimated R10.2bn in direct and indirect taxes to South African public finances, including an estimated amount of R7.2bn which related to the listing of Prosus in September 2019.

Prosus is very big on Edtech.

Prosus has invested over $3bn in 9 companies in the Edtech space.

It is often said that education is an area of massive consumer spend which is expected to reach $10trn by 2030 that remains largely untouched by technology.

In 2015, Naspers through its Naspers Ventures made a strategic investment of ~$60m in Udemy and has since invested +/-$121m in Udemy.

Prosus holds a ~13.98% stake in Udemy.

Prosus’s latest acquisitions/investments in Edtech:

Stack Overflow for $1.8bn (community and Q&A platform for developers).

62% of GoodHabitz for $259m, (online corporate training leaders)

$500m investment in Skillsoft (corporate digital learning company in the US).

South Africa’s direct investment liability inflows increased from R17.4 billion in Q2 of 2021 to R557.9 billion in Q3, as among others, Prosus N.V
acquiring 49.5% of Naspers Ltd from the existing Naspers Ltd shareholders.

Portfolio investment liabilities ⬆️ from an outflow of R0.1bn in Q2 of 2021 to an outflow of R370.9bn in Q3.

Net sales of equities of R362bn in Q3 of 2021 can, among others, be attributed to non-resident investors exchanging shares held in Naspers Ltd for Prosus N.V. shares.

When Naspers and Prosus take a beating due to the regulations that affect Tencent, market participants specifically portfolio managers in South Africa quote "ebhen phoyeth" Malusi Gigaba when addressing the issues affecting the decline in the share prices.

36 asset managers and investors (who collectively represent total assets under their management of more than R3.6trn) wrote an open letter to the boards of Naspers and Prosus not to go the route of the share exchange between the two companies.

Naspers and Prosus: