Prosus: Tencent Risk/Reward

Prosus is a holding company controlled by Naspers (South Africa) who 20yrs ago invested in a Chines internet company with a goal to sell $10 cents to every Chines i.e. Tencent. Today that stake is worth US$122bn.

A holding company, like the very famous Berkshire Hathaway of Warren Buffet fame, acquires private and publicly listed companies and looks to create value by buying cheap, injecting capital, ideas or taking cash flow and investing in other ideas.

Naspers/Prosus have been enormously successful, but this has not been reflected in the share price given a near 50% discount to NAV (net asset value). This means that it’s priced under its liquidation value. The Tencent stake is worth more than Prosus market cap and net debt.

To address this market “inefficiency” the group has decided to buy back massive amounts of its shares funded by Tencent shares sales. They are selling a high-priced asset to buy a very low priced one and close the NAV discount.

The strategy calls for daily sale of Tencent shares limited to 5% of average daily trading volume (ADTV) and split the proceed, 58% for the Prosus buy back program and 42% for the Naspers buy program (a positive feed back loop). This means that if Prosus sells down to a 10% stake in Tencent, NAV climbs to E$282 assuming all other assets stay at current values.

This could arguably be one the best risk/reward trades in the market. The main risk is if Tencent falls and can not supply as much cash as expected, which reduces the Prosus buy back. On the positive side, Prosus and Naspers share will get a constant and significant buy inflow. While Prosus benefits from exchanging a higher priced asset (Tencent) for their own lower valued ones.

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