While nobody can deny the success of Naspers’s ventures into the global world of e-commerce – or that the current unbundling and listing of the international assets on Euronext Amsterdam seems logical for continued growth – it remains to be seen how international investors will welcome the new company to Europe. Many will also want to see to what extent the new listing will unlock value for Naspers shareholders.
The circular with information pertaining to the unbundling and listing of the yet-to-be-named NewCo, including a notice of the general meeting to seek shareholder approval for the process, makes it seem much less exciting than anticipated since Naspers first announced its plans at the end of March.
The restructuring is bound to disappoint shareholders and other South African investors who hoped for an innovative deal to reduce the discount to net asset value and remove Naspers’s overwhelming weight in the JSE All Share and Top 40 indexes. And a lot of shareholders will be very unhappy when they realise the deal will burden them with a hefty bill for capital gains tax (CGT) in the current tax year.
The circular to shareholders reiterates that one of the major reasons for the unbundling is to reduce Naspers’s unusual weight in JSE indices, an issue CEO Bob van Dijk also raised during a conference call to address questions about the proposed listing.
The notice to shareholders states that the rapid growth, which made Naspers one of the 10 largest internet companies in the world in terms of market capitalisation, also resulted in a situation where the value of Naspers comprises some 25% of the total market capitalisation of the JSE All Share index.
According to the circular: “The outsized weighting on the JSE and in key FTSE/JSE indices exceeds most SA institutional investors’ single stock limits. As a result of the limits and mandate restrictions, many SA institutional investors have been forced to sell their shares in Naspers as the share price increased.”
To counter this, Naspers has already enlarged its American Depository Receipt (ADR) facility, listed MultiChoice separately and trimmed its stake in Tencent, with only a limited effect on what Naspers management terms the “unique market dynamics”.
How far the separate Euronext listing will go to address the problem must still be seen as Naspers will remain the largest South African company on the JSE by market capitalisation, while NewCo’s secondary listing on the JSE will probably also make it one of the biggest companies on the exchange and still part of the major indices.
The reason is that Naspers will retain an interest of around 73% in NewCo and any improvement in the valuation of the underlying international assets will almost directly increase the value of the locally-listed Naspers. Thus, the problem of the ‘market dynamics’ will remain.
The reason for the problem is that the JSE uses the number of shares available to local shareholders – the so-called free float – to calculate a company’s weight in the indices. In the case of Naspers, the free float is 100% of its shares. The free float of other large companies such as British American Tobacco, Richemont and AB InBev is much smaller because shares on foreign share registers are excluded.
In contrast, NewCo’s value will either be reflected in the Naspers share price, or in the price of NewCo’s JSE stock, which will be owned by local investors and count towards the free float.
The situation will only change when NewCo gains popularity among international investors and they start calling their stockbrokers in Amsterdam. But few shares will be available unless Naspers starts selling off a bit of its holdings.
It will also be interesting to see if international investors accept the structure of different classes of shares with different voting rights.
Naspers shareholders either got used to the idea that they have less say in the company than the owners of the unlisted A-shares (Naspers Beleggings and Keeromstraat 30 Beleggings) or don’t care that those shares have 1 000 votes each.
NewCo will use a similar structure of ordinary shares and unlisted A shares. The ordinary shares will be issued to owners of the listed Naspers N-shares, while Nasbel and Keerom will receive unlisted A-shares in NewCo. Initially, the shares will have equal voting rights, until Naspers’s stake in NewCo decreases to the point that it holds less than 50% plus one share in NewCo. Then the unlisted A-shares will be awarded 1 000 votes each to retain control of NewCo.
Fund managers might not like it
Such structures are still allowed in Amsterdam, and this is one of the reasons Naspers chose the Netherlands as its primary domicile. But a lot of fund managers might not like it, or their mandates may restrict investments in companies with differential share structures.
CGT in SA would also determine how Naspers’s weight in the index will change. Local shareholders have the option of choosing additional Naspers shares if they don’t want NewCo shares due to tax considerations.
At first glance, it seems most investors would rather swap their local shares for international shares, but the structure of the unbundling hides an unwelcome tax surprise.
In terms of the proposal, shareholders will receive new Naspers M-shares as a capitalisation issue, which do not have immediate tax liabilities. Capitalisation shares are exempt from dividend tax, but CGT become payable whenever the shares are sold.
The circular states that the initial cost of these shares for the purposes of CGT will be deemed to be nil, meaning that the full value of the shares will attract CGT whenever a shareholder sells them. The M-shares are automatically replaced by NewCo shares, which is effectively seen as two separate transactions: the sale of M-shares and the purchase of NewCo shares.
Individual shareholders could therefore face a capital gains tax bill of around 18%.
This is effectively what it will cost SA investors to get NewCo shares, which will still be registered on the SA share register. Alternatively, shareholders can elect to rather receive Naspers N-shares instead of NewCo shares.
Some shareholders might argue that they will still get the benefit of NewCo’s Amsterdam listing, via Naspers’s shareholding, without paying CGT this year. But CGT will eventually catch up with them.
Van Dijk said Naspers had a good response from the shareholders that management has met with to date to gain approval for the process.
Still committed to SA
The unbundling makes operational sense, with NewCo focusing on international businesses and opportunities, and attracting new investors in the international financial markets. Management says Naspers remains committed to SA and still see a lot of opportunities.
Van Dijk says Naspers is the largest investor in new technology start-ups in SA and will remain the biggest. It has committed R1.4 billion to Naspers Foundry, which focuses on new technology ventures. This is in addition to the R3.2 billion it has made available for growing existing businesses in SA.
Van Dijk says NewCo will list on July 17 on Euronext Amsterdam and on the JSE if all conditions are fulfilled.
The first step is for shareholders to rubber-stamp the process at the meeting on June 28.
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