One Wednesday last August, shares of South African internet and media giant Naspers suffered their biggest single-day drop in 10 years based on news from a company a third of the world away.
Shenzen, China-based Tencent had just posted earnings that missed analysts’ predictions. It sparked a sell-off in shares of Naspers, which owns 31% of the Chinese internet giant. The decline highlighted a reality for Naspers: The fortunes of the Cape Town-based company—the most valuable in Africa—are intrinsically linked to the Chinese conglomerate.
In 2001, Naspers paid $32 million for a 46.5% stake in Tencent, which had formed three years earlier to offer an instant messaging service. Fast forward to Wednesday, when that stake, which has since been reduced, was worth roughly $116 billion.
The return makes Naspers’ stake in Tencent among the top-performing venture investments of all time. Naspers accounts for a fifth of the value of the 150 largest stocks on the Johannesburg Stock Exchange (JSE). In fact, if Naspers were listed in the US, it would rank among the 25 largest companies listed on the Nasdaq behind giants like Google and Netflix but ahead of some household names like Starbucks and Kraft Heinz. But investing prowess has created a paradox for Naspers: its stake in Tencent is worth about $30 billion more than all of Naspers combined. Though Naspers owns or has stakes in roughly 42 media and internet businesses in more than 120 countries, the discount derives from the reality that most of the rest of the internet ventures that Naspers comprises don’t generate that much cash.
“Until those assets generate positive free cash flow they are nascent businesses in nascent industries, so people have been conservative in how they value those assets,” Philip Short, an analyst who follows Naspers for Old Mutual Investments.
Besides Tencent, Naspers’ holdings include online classifieds marketplaces in more than 40 countries, (including letgo, one of the fastest-growing classifieds apps in the U.S. and Avito, the top classifieds-ad site in Russia); the top pay TV services in 15 African countries; and PayU, among the main rivals to PayPal in the developing world.
In addition, Naspers owns 28.4% of Mail.ru, which operates Russia’s most popular social network, and roughly 25% stake in Swiggy, the Bengaluru-based food delivery service that is among the speediest of startups in India to be valued at more than $1 billion.
While the value of its businesses beyond Tencent challenges Naspers, the company’s outsize presence on the JSE and the geography of capital markets weigh on it as well.
Rallies in shares of Naspers force institutional investors in South Africa, who own roughly 40% of the company’s shares, to trim their holdings to avoid weighting their portfolios too heavily toward a single stock. Because Naspers’ shares trade in South African rand, the company also contends with skittishness about South Africa’s currency among offshore investors.
“It’s frustrating for them because execution has been really good, but you have these structural issues,” says Short.
Management is on a mission to address the imbalances. For the past year, the company has focused on growing (and partially listing) its businesses in classifieds, food delivery and payments with the aim of counterbalancing its stake in Tencent.
Naspers also is looking to bolster growth in its backyard. In October, the company announced plans to invest $315 million over the next three years in tech startups in South Africa.
The funds form part of an $8.2 billion war chest that Naspers has amassed for technology investments by trimming its stake in Tencent and offloading shares in the Indian e-commerce marketplace Flipkart.
“The heart of our strategy is to build and invest in entrepreneurial platform companies in fast growing markets, particularly when they address large societal needs,” Bob Van Dijk, Naspers’ CEO, told analysts in December.
The data suggest the push may be starting to pay off. For the six months that ended on September 30, Naspers had $271 million in free cash flow, compared with $96 million that went out the door over the same period a year earlier.
In September, Naspers announced plans to list its video businesses as a stand-alone company on the JSE. Short envisions Naspers eventually listing its internet businesses in either Hong Kong, Europe or New York, where the shares would trade in comparatively stable currencies and vie for attention from a broader pool of investors.
“Building scale by investing more in those pillars will get the value realization up, and you will get a more diversified portfolio of Tencent versus the rump,” he says.