Would it be a good idea to break up Naspers? Not so fast …

When Ton Vosloo tapped Koos Bekker to take over as CEO of the Naspers in 1996, Bekker said he would take no salary, no benefits, and a contract that would allow him to be dismissed without a golden handshake if he did not deliver.

But he wanted to be paid in shares.

Vosloo was generous in response, giving Bekker a big bundle of shares. Exactly how many is not known for the first five-year contract, because it was not then a JSE requirement to divulge it. But in his second five-year contract he received 11,6-million shares, about 3% of the company. If he sold this second lot as they were released, Bekker would have profited at as much as R1-billion per year. At today’s value, that 3% would be worth over R30-billion, and he had three five-year contracts as CEO before he became chair, each coming with a bundle of shares.

In a country where CEOs of major companies ogten, Bekker is in a league of his own.

No doubt, when he chose his successor, he needed to show some generosity. Bob van Dijk earned R63-m this year – nothing like what Bekker earned but still breathtakingly high. And at last week’s AMG, shareholders were questioning it.

The logic of Bekker’s pay deal was, of course, was that he was prepared to bet on the company and share the risk – getting nothing if he did not deliver as CEO. Bekker could do this because he had made a personal fortune already on the MTN launch.

Indeed, things looked bleak when the dotcom bubble burst in 2001, and the Naspers share dropped from just over R100 to R12 – well below its listing price of R19 seven years earlier. Bekker would have been out of pocket for his first five years of service if he took up and sold his shares then. In fact, he was lucky to keep his job. But nobody could have predicted that Bekker would take Naspers from that low point to where it is today, topping R3 000 per share last week. That’s a 250-fold growth, and a 50% growth in the share price in the last year alone.

The reason for this extraordinary boom has something to do with good management, a fair amount to do with Bekker’s willingness to take calculated risk, , but most of all it is the result of astounding good fortune.

After the 2001 crash, Naspers decided to pull out of most of its Chinese and other international interests, and wrote off many hundreds of millions in investment . 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% of their company for R266-m.

Tencent today is worth $390-bn (over R5-trillion) and growing fast. Naspers has diluted to 33% of the company, but Tencent is still the major factor in the extraordinary growth of Naspers and how well it has done for its shareholders, especially Bekker.

Which is why shareholders are upset. They can’t complain that they haven’t made pots of money, more than they would have on any comparable investment over this period of time. But their shares still appear undervalued.

Their investment alone in Tencent is worth substantially more than the current Naspers market capitalisation of R1,3-trillion. This means that the Tencent share is undervalued, and the market is ascribing negative value to its many other, very substantial assets – like Media24, which is the giant of South Africa’s media industry, the huge cash-producing Multichoice/DSTV, Mail.RU in Russia, eMAG and dozens of others in 120 countries.

This makes Naspers a natural target for an asset-stripping break-up, which could release huge value. Just releasing the Tencent shares to Naspers shareholders would get them an additional $31-bn, and that is before you ascribe value to the other assets. Shareholders are restless.

Why should Van Dijk earn so much when all the value comes from Tencent, an investment which he does not even run, they argue? Why should he do so well when he is failing to get the value out of the other assets where he has greater control? If you strip out Tencent, then the balance of assets made a trading loss of over $200-mllion.

Van Dijk is the easy target for shareholders who are looking to realise what they see as the hidden value in the company. It is not that they are unhappy with his performance, but some are seeing a potential for more quick profits.

Greedy, you might, say, considering they have done so well from the company already.

It is also unrealistic, as Bekker has an iron grip on the company through an N-share structure, an anachronistic hold-over from the days when such control mechanisms were still allowed by the JSE.
The company’s N-shares have 1 000 votes each, as against one vote for ordinary shares. So the majority may have voted last week against the remuneration policy, but the policy will stand.

Since the days of apartheid, when Naspers was very much part of the Afrikaner nationalist project, National Party cabinet ministers sat on its board and its political editors attended closed National Party executive meetings, these shares were held by Sanlam, to keep them in the political family.
Seeing the value, another giant Afrikaner company, PSG, in 2008 quietly offered Sanlam a huge premium for the small number of controlling shares. Bekker and his close friend and long-term colleague Cobus Stofberg took fright at the prospect of a silent takeover, sold a bunch of their ordinary shares and bid even higher to take control. These shares hold 68% of the votes and how they are held is a dark secret.

Bekker argued that this was necessary to preserve the independence of a media operation which had shifted from being a friend of the apartheid government to a more independent critic of the democratic government. Also, the Chinese government – which keeps an iron grip on its media, and a cast iron grip on foreign investors – might not allow a foreign company to hold such a large chunk of a media operation unless control was clear and stable and to their liking.

Indeed, the prosperity of Naspers is dependent on its relationship with the Chinese government, not unlike its earlier relationship with the apartheid government. This might explain why when the previous Chinese premier visited South Africa, Bekker draped a massive banner welcoming him over Nasper’s prominent Cape Town building.

Should this relationship go sour, the company would fall apart.

Tight control, Bekker has argued, is a necessity. So is size in the global internet market and a steady, long-term view. It is their size that allows them to spend a over $1-billion (R13-billion) this year on development, up 8% from last year.

They list six companies in their portfolio as 3-5 years away from reaching their full potential, with five as “high-growth opportunities” and a couple that will take five or more years, indicating that they see significant value coming in time from a number of their other assets. Shareholders might get a quick profit if they broke up the company now, but then what?

That is why he dismissed the agitators so firmly and abruptly at last week’s AGM.

Interestingly, Nasper’s apartheid past (when it was known as Nasional Pers) is also coming back to haunt it. Vosloo has always portrayed himself and Naspers as key drivers of reform in the National Party and early supporters of negotiations in the 1980s. He refused to go before the Truth Commission to account for Nasper’s role in apartheid, and was livid when a large group of his staff did so and expressed regret for the role the group had played in failing properly to report on the horrors of that period.

How embarrasing then when details recently emerged of company donations to the National Party through the 1980s, including warm letters of appreciation from Vosloo to Presidents PW Botha and FW de Klerk. These were published recently in Daily Maverick and Hennnie van Vuuren’s book, Apartheid Guns and Money.
As late as August 1989, Vosloo was writing to the National Party leadership promising a substantial donation, pledging Nasper’s wholesale support and describing their newspaper Beeld as “your ally” which would help the party “wipe out” the opposition.

This is particularly relevant as there has long been speculation over the deal that gave Naspers control of MNet (now Multichoice and DSTV) during that period. Faced with over 100 applicants for the pay-TV licence in 1982, the government handed it to a consortium of newspaper companies led by Naspers. That pay-back saved a struggling Naspers and put it on its path of extraordinary growth since then. It was a mutually beneficial deal: the government gave Naspers control of the pay-TV monopoly and in return got the group’s political support at a critical time when it was shoring itself up against local and international pressure.

The real surprise was that this monopoly was preserved into the democratic era, giving Media24, the local media operation, the foundation to become the giant of the South African media sector, with the lion’s share of the newspaper, magazine, book and internet industries.

Would it be a good thing for shareholders to break up this operation and realise the full value in it? This might allow for greater diversity and the transformation of our media industry which many are agitating for. But, at a time when the sector is under dire financial pressure (Media24 had a 3% drop in revenue last year and a 34% drop in trading profit) , it would remove the protection the international group offers to its local operation. Would their newspapers, which have been shedding readership and revenue along with all the others, survive long without this big brother? Does this cover allow it to see through the difficult period until the shift to the internet starts to work, and new business models revive the news operation?

Ironically, some of Media24’s operations have become important carriers of critical, independent journalism, publishing and broadcasting – so breaking up the giant might have short-term, quick-profit benefits for shareholders, but uncertain results for the country and its media industry.

*Harber holds a small number of Naspers shares (which might tell you which way he thinks the wind is blowing). This article first appeared in Business Day.

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