AMSTERDAM/JOHANNESBURG: Prosus, Europe’s answer to SoftBank’s Vision Fund, is wagering that its long-term investments can close a valuation gap and establish it as one of the world’s most aggressive technology investors. Prosus was spun off of Naspers in South Africa in 2019 with a mandate to manage the benefits of a US$32 million bet on China’s Tencent, which is now worth US$200 billion, over a 30-year investment horizon.
SoftBank’s own firepower is bolstered by its share in Alibaba, which dates back to SoftBank CEO Masayoshi Son’s US$20 million investment in the Chinese e-commerce company.
Prosus and Softbank, according to a banker who has dealt with both, are “the two global elephants out there with tremendous permanent cash” for digital investments, and the rivals are occasionally co-investors.
Prosus hired Ervin Tu, a managing partner at Vision Fund and a former technology banker at Goldman Sachs, to manage its group M&A last month, indicating its ambition.
Tu’s appointment “tells you that there’s probably going to be more (M&A) activity coming down the line,” says Jean Pierre Verster, CEO of South African investment manager Protea, which holds nearly 10% of its fund assets in Prosus.
Prosus has made a dozen investments since April, most recently announcing the US$1.8 billion acquisition of software development platform Stack Overflow.
“We have huge capacity on our financial sheet, and we also see extremely strong prospects in the categories we operate today,” Prosus CEO Bob van Dijk told Reuters, adding that while the two investors competed at times, they had major distinctions.
Verster sees the Stack Overflow deal as an indication that Prosus would “become a little more aggressive,” though he expects the company, which owns a mix of controlling and minority shares in a number of IT companies, to remain more conservative than Softbank.
REMEMBER THE GAP
Apart from Tencent, Prosus has had a difficult time in its early years, with a complicated structure and operational losses at most of the investments it has made, causing it to trade at a substantial discount to the value of its assets.
Its stock market value is 25% less than the market value of the 28.9% stake in Tencent that it now owns. Naspers, which controls Prosus, has a discount of more than 40% on its economic holding in Tencent. (Click on https://tmsnrt.rs/3hD4Ukk for an interactive graphic.) ) This discount, according to Bob van Dijk, who is also the CEO of Naspers, is just temporary, and that investors have done well so far and will continue to do so in the long run. “You just have to look past the losses,” he continued, “and the potential and quality of the business model are far more significant than short-term profitability.” One option to close the gap is to progressively offload the crown jewels, as Prosus did in April when it sold a 2% interest in Tencent, the company that owns WeChat. Once a cross-holding structure with Naspers is in place, a third of that will go to share buybacks. The acquisition is expected to be approved by Prosus shareholders on Friday. According to Prosus, the actual solution to the valuation disparity is to identify more new investments and improve profitability at existing ones until they can compete with or even surpass Tencent’s ownership. That’s why Prosus is investing the remaining US$10 billion from its most recent stake sale into expanding its portfolio, which includes online classifieds, fintech, educational software, and online food ordering and delivery. THERE IS NO END GAME The problem facing Van Dijk and his new SoftBank hire Tu is to find the next Tencent among the tens of thousands of technological start-ups around the world. Prosus invests in only one out of every 200 to 300 opportunities it examines, according to Van Dijk, across a wide range of industries. The more established portfolio includes companies such as Codecademy in the United States, Swiggy in India, Mail.Ru in Russia, and OLX, a worldwide marketplace operator. Banafsheh Fathieh, the head of Americas, leads a two-dozen-person venture arm that makes early-stage investments. The Prosus board oversees investments worth more than $200 million. Fathieh, who works out of a modest San Francisco office, claims that her portfolio is nothing like the Silicon Valley bubble. “We’re not your typical venture financing firm. If you look at things from a 30-year perspective, you may target entrepreneurs that have long-term ambitions to establish long-lasting businesses “In an interview, she stated. What sets Prosus/Naspers apart, according to Fathieh, is its willingness to engage in entrepreneurs and firms that it believes in, without the typical 3- to 7-year “exit plan” that most venture capital and private equity investors have. “There is no end game” at Prosus/Naspers, according to Fathieh. INGREDIENTS FOR CONSCIOUSNESS Prosus is certainly eager for more in the food ordering and delivery market. Its original investments in Delivery Hero in 2017 had tripled in value, and it spent 2.2 billion euros in March to enhance its position in the German company. One of the companies targeted is iFood of Brazil, which supplied 500 million meals last year. Prosus controls two-thirds of the company, and co-owner Just Eat Takeaway.com wants to sell the remaining third for more than $2 billion. Such expenditures are paying off, as sales from Prosus’ non-Tencent ecommerce operations increased by 46% to US$6.2 billion in the fiscal year ended March 31. Despite US$429 million in trading losses, Prosus’ net profit including Tencent nearly doubled to US$7.45 billion, demonstrating how much the holding still dominates earnings. “I’m thrilled if they expand at 30 percent each year,” Protea’s Verster remarked. “Any reduction in the discount is merely a bonus.” The market discount may linger when the cross-holding structure is in place, according to Jefferies analyst Ken Rumph, who rates Prosus shares as a hold. “Investors are put off by the same issues they had with Naspers,” including a convoluted control structure, he adds. “Even a sustained 20% return on investments elsewhere in the portfolio will take years to shift the balance away from Tencent,” Rumph said, adding that “even a continued 20% return on investments elsewhere in the portfolio will take years to shift the balance away from Tencent.” (Toby Sterling, Promit Mukerjee, and Abhinav Ramnarayan contributed reporting; Rachel Armstrong and Alexander Smith edited the piece.)/n
