Naspers and Prosus’ big cross-holding structure change

Dutch e-commerce investor Prosus and its parent Naspers received approval from South African regulators to remove a cross-holding structure, boosting both companies’ shares.

The South African Reserve Bank gave the required approvals for a proposed transaction that will remove the complexity of the cross-holding structure and allow Naspers to continue a share buyback program, the Dutch company said in a statement on Tuesday.

Naspers shares were up 9.4% in Johannesburg, while Prosus rose 9.1% in Amsterdam.

The structure was introduced in 2021 as management sought to reduce Naspers’s weight on the Johannesburg Stock Exchange, which it dominated thanks to its stake in Chinese internet giant Tencent Holdings Ltd. Its size relative to the South African bourse has since dropped, removing the justification for the complex arrangement.

Naspers and Prosus’ decision to unwind the unnecessarily complex and ineffective cross-shareholding is welcome but only reverses a bad move the same management made in 2021.

The new structure will still look very much like a holding company for the Tencent stake, with a relatively small set of other investments on the side.

A more aggressive move to distribute this stake looks unlikely, given current management.

Telecommunications and media analyst John Davies said management wants to reduce the discount between Naspers’s and Prosus’s value and the group’s 26% stake in Tencent.

Naspers was an early investor in the Chinese company, and as its shares soared, investors put a disproportionately high value on the stake versus the company that owns it.

“Removing the cross-holding now does not unwind the benefits of what we did in 2021,” Prosus Chief Financial Officer Basil Sgourdos said in an interview.

Naspers split off Prosus in 2019 to manage the Cape Town-based company’s tech holdings and the Tencent stake. When the cross-holding between the two businesses was introduced, it resulted in Prosus owning 49.95% of its parent company.

About a year ago, Prosus started to reduce its holdings in Tencent to fund a stock buyback.

The regulator’s permissions will allow Prosus to be diluted out of its shareholding of Naspers, while Naspers will retain control over Prosus and a 43% direct economic interest in the company.

“The open-ended buyback created about $30 billion in value” to date, Naspers CEO Bob Van Dijk said in an interview.

“However, we were going to run into limitations, and by removing the cross-holding we will be able to continue with the program.”

Van Dijk said there would be a vote on the transaction later in the year.

Tencent shares were up 2.6% on the news that the cross-holding will be removed.

“Naspers would have been stuck at max 10% share buyback without this proposed transaction,” said Peter Takaendesa, head of equities at Mergence Investment Managers.

“We will have to see if there is nothing in the proposal that will stop shareholders from supporting the transaction.”