Naspers burned cash with stupid deals – Piet Viljoen

Merchant West Investments Value Fund manager Piet Viljoen says Naspers management destroyed tremendous shareholder value and got fabulously wealthy in the process.

Naspers and Prosus recently announced that they expect their headline earnings per share (HEPS) to drop between 74% to 82%.

“Overall earnings in the period were impacted primarily by a reduced profit contribution from our associates, particularly Tencent,” the companies said.

During the year, they reduced their stake in Tencent from 29% to 26%, and the cash acquired from those sales was used to repurchase shares.

“Combined with the discount narrowing of approximately 17 percentage points, the repurchase transaction has created approximately $29 billion in value for shareholders.”

Commenting on the latest results, Viljoen said Naspers’ management neglected to say they destroyed this value through poor deals.

He said Naspers should rather say they recovered $29 billion worth of value. “It would be a lot closer to the truth,” Viljoen said.

He gave a tongue-in-cheek summary of Naspers’ initial success, and then the value destruction which followed.

Naspers bought a 46.5% stake in Chinese internet company Tencent in 2001 for $32 million – an investment which made Naspers the multi-billion company it is today.

Tencent became a cash cow for Naspers. The new Naspers management team inherited this cash cow and decided to look for the new Tencent.

However, through numerous bad investments and stupid deals, the cash is incinerated, and shareholders lose out.

Despite the bad deals, the new management team became fabulously wealthy along the way. It created unhappiness among many shareholders.

“The new management team doesn’t listen, putting in place more ridiculous structures to keep buying time,” Viljoen said.

After the market continued its vociferous opposition to what the management team is doing, they eventually listen and buy back shares instead of throwing cash in the furnace.

“The new management team celebrates this success like it was their own and becomes even wealthier,” Viljoen said.

Shortly after the share buyback was announced, non-executive directors started selling millions of rands in shares.

Naspers CEO Bob van Dijk did the same, selling R1.72 billion in Naspers shares in seven transactions amidst the buyback program.

During the same period, Naspers’ financial director Basil Sgourdos also sold R98.9 million in Naspers shares.

“Directors of Naspers are selling large chunks of shares while the company is in a buyback program. Have they no shame?” Viljoen said.

He previously said if Naspers’ management was truly concerned about creating shareholder value, they would unbundle their Tencent stake and give investors the full value of their holding.

Many investors would argue that the Naspers management team deserves their riches, especially after the Naspers share price increased 77% over the last year.

Viljoen explained that the share price rise was a result of the share buybacks closing the gap to NAV, rather than anything to do with performance in the rest of the Prosus portfolio.

He added that the Naspers share price has been flat over the last three years, which is a better reflection of the management team’s performance.