If you feel bad about the 46% tumble in your Prosus investment this year, consider that in early January CEO Bob van Dijk bought $8.8m worth of Prosus shares at just under €72 each. This week those shares are trading at about €45, reducing his five-month investment to just $5.5m. Group finance director Basil Sgourdos hasn’t suffered as badly on his March purchase of 20,000 Prosus shares at €56.17, but it’s still early days.
Then there are all the currently worthless share options they’ve been awarded over the past few years. And let’s not forget the 57.9-million Prosus shares repurchased since August 2021. The average cost for those shares was €72.70, which meant a €4.2bn investment for Prosus. It’s now worth €2.6bn.
It is something of an understatement to say things have not been going well for Prosus these past 12 months. It seems to be under fire from every angle. Global politics, recession and a downward reassessment of the attraction of loss-making tech companies with presumed long-term potential have combined into a vice-like grip on Prosus.
But Zaid Paruk, portfolio manager and analyst at Aeon Investment Management, says there may be some good news on the horizon. He believes that because of the extreme pressures it’s under, the Prosus executive team is now fully focused on reducing the gaping discount between the group’s investments and its share price.
We got the impression everything is on the table, all investments are up for deliberation in terms of unlocking value
— Zaid Paruk
“In a recent engagement with them we got the impression everything is on the table, all investments are up for deliberation in terms of unlocking value,” Paruk told the FM. Instead of looking to expansion, the team is focusing on ways to reduce the discount, which remains at about 60%. Paruk believes there are some easy wins on this front, such as unbundling or selling off the shares in China’s second-biggest e-commerce company, JD.com, that it received from Tencent earlier this year. A sale of its 40% stake in Swiggy, an Indian online delivery platform, would also be reasonably easy, as would a similar action at Delivery Hero and Ctrip. Paruk says it’s unclear how committed the executives are to an unbundling strategy but it’s encouraging to know it’s on the table.
Protea Capital Management CEO Jean Pierre Verster believes a dismantling of Prosus is on the cards and that it’s just a matter of time. “Their capital allocation over the past few years has been poor and it’s increasingly difficult to justify its continuation as an operating holding company.” Unbundling the listed investments and bulking up unlisted ones through mergers would produce some good salvage value for Prosus shareholders, he believes.
One analyst, who did not want to be named, cautioned against any positive unbundling developments. “The last time this management team told the market they were considering all options in an attempt to reduce the discount, they created Prosus and followed that up with a pointlessly complex cross-holding structure. So I’m a bit sceptical.”
Whatever hopes Prosus management might have had for some short-term relief from China were dashed by the recent worse-than-expected quarterly results from Tencent, which revealed the slowest turnover growth since its listing in 2004. Net profit was down by a staggering 51% against the same period in 2021. And forget about encouraging noises; if anything, Tencent management seemed intent on discouraging any hope that things would pick up in the near term.
Its reticence is somewhat surprising. A few days before the results were released, the Chinese government had held a special symposium on the digital economy at which Liu He, one of the vice-premiers of China, said government would support the “healthy development of the platform economy and private sector”. Within days analysts at JPMorgan U-turned on their previous robust description of China’s tech sector as “uninvestable”. They were now upping their rating of the seven biggest internet firms, including Tencent, from “underweight” to “overweight”.
But Tencent executives warned analysts there would be a time lag before government support would translate into a real impact on the business. Even then, not everyone is persuaded it will have much of an effect. Certainly the good old days of unrestrained growth are gone.
In an interview with SupChina newsletter, veteran China analyst Rui Ma said the government has prioritised building a highly digitalised society, so has no intention of killing the industry. But she added: “The government also believes that private enterprises need to be reined in by regulations and higher socio-political-economic objectives than just financial returns. In their minds, they need to balance these two forces, which they believe to be complementary and necessary, instead of choosing one over the other.”
Tencent chief Pony Ma seems in step with this sort of government approach, which means he might be hesitant to flaunt results that contradict it.
It’s not just government’s tightening grip on the tech sector; its determination to stick with a zero Covid approach has dealt a huge blow to economic growth
But it’s not just the government’s tightening grip on the tech sector; its determination to stick with a zero Covid approach has dealt a huge blow to economic growth, making it unlikely that China will get close to the government’s 5.5% growth target for this year.
Then there’s the headline- grabbing news about Prosus’s valuable cash-generating Russian investment Avito, the biggest online classifieds business in that country. After holding out for three months Prosus has finally succumbed to pressure and decided to look for an “appropriate” buyer for the business.
Initially, when the world presumed Russia would have completed its Ukrainian campaign within weeks, Van Dijk told analysts Prosus would continue to run Avito, as it was not subject to sanctions. He said it provided a valued service for many ordinary Russians and employed 4,000 people “who are our people”.
A few weeks later, with pressure mounting, Prosus announced it would cease all involvement in its Russian operations. “Avito will operate as an independent Russian entity run by a local management team and governed by its own board of directors,” said Prosus. Though it was not going to invest further or seek to benefit economically, Prosus would hold onto its 99% stake.
In mid-May Oleksii Makeiev, Ukraine’s special envoy on sanctions, wrote to Van Dijk and Naspers chair Koos Bekker, urging them to sell Avito. Prosus said it would not abandon its 4,000 employees. Days later, however, it announced a U-turn. After completion of an operational separation, “Prosus has now decided to exit the Russian business. We have started the search for an appropriate buyer for our shares in Avito.”
Prosus has not said why it changed its mind. It could be it that it realised the war might be a drawn-out affair. And it could be that the Ukrainian PR Army, a group of Ukrainian volunteers determined to use their communication skills to fight the Russians, showed no signs of letting up in their campaign against Prosus and any other Western companies operating in Russia. Its most recent media project in the Prosus campaign is a chilling juxtaposition of the Ukrainian war against the Chelsea flower show which, the PR Army highlighted, is being sponsored by Bekker’s UK country estate.
As with every other Western company that has publicly undertaken to sell its Russian operations, there is the concern the only buyers with funds are Russian oligarchs. There is also the possibility that this pressurised virtue-signalling is all about buying time in the hope the war will be resolved before any sale is finalised.
The PR Army’s Alex Kuprienk is aware of these dangers. In Prosus’s case he tells the FM: “Even just their statement makes Russia more toxic and unacceptable for Western investors.” He is also hoping that in the meantime efforts will be made to moderate the Avito sites, which the PR Army says are supporting the Russian war effort.
So all-in-all a difficult time for Prosus and for Naspers — probably as bad as Naspers has experienced since 2001, when the dot-com crash dealt it a near-death blow.
But remember how it bounced back from that?
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