Should investors be concerned about Naspers’ control structure?

Earlier this month Caxton raised questions about Nasper’s complex control structure. At a Competition Tribunal hearing it contended that an enquiry was needed to determine who directs the company’s strategy.

The Tribunal ultimately rejected Caxton’s application to intervene in its hearings about the merger between Naspers’ controlled Media24 and Novus, as the issues about Naspers’ control structure were not relevant to the proposed transaction. However, the question remains whether investors should be more concerned about who controls Naspers.

The essential question is whether Naspers’ shareholders are able to exercise meaningful oversight over the company. Caxton believes that the majority of voting rights rest with entities closely aligned to the company and its chairman Koos Bekker. In a sense, Caxton argued, Naspers controls itself.

If this is the case, where does that leave other investors?

“In principle, the public listing of a company’s ordinary shares provides an opportunity for any shareholder who is willing to pay the asking price, to gain a proportionate level of voting rights,” notes Charl Kocks of Ratings Afrika. “And if the company is not performing as well as shareholders believe it should be capable of doing, then a takeover by a party that can improve performance, should be possible. This is one way that management is held to account; for if it does not deliver the goods, it could be replaced by a different set of directors.”

However, the way Naspers is structured, this might not be possible. Caxton argues that there is a controlling block of voting shares that effectively dominates and leaves minority shareholders without any meaningful say.

“This is one reason why the modern view on the listing of non-voting (or low-voting) shares is critical, and why control blocks are the subject of criticism,” says Kocks. “At least when they are apparent, any new shareholder will take them into account before investing; but if they are hidden, they may cause nasty surprises at voting time. As a further concern, hidden control blocks raise uncomfortable questions in respect of the reasons for their secrecy.”

Moneyweb approached a number of asset managers for comment on this issue, but most were reluctant to express an opinion, citing the matter’s sensitivity. It is unclear whether they are engaging with the company in private on the matter, or whether they are simply content to let it slide as long as Naspers continues to perform.

Brad Preston, the chief investment officer for listed investments at Mergence, agreed that the control structures are unclear. However, he points out that there may be both negatives and positives for shareholders in this structure.

“Practically, management and the chairman have control of the company,” he points out. “Even if we accept the argument that the A shares don’t have a majority of voting rights, it would be very difficult to see control taken by a hostile party. PSG’s failed attempt to do this in 2006 is a case in point.”

He agrees that, given the discount that Naspers trades to its net asset value, it may be vulnerable to a takeover if this control structure was not in place.

Where more questions arise is whether minority shareholders can have any influence over company strategy. Naspers continues to invest heavily in operations outside of Tencent that are not yet generating meaningful returns, and has shown little interest in unbundling any of its assets that some investors believe would unlock value.

“On the one hand, there is an argument that Naspers would never be able to go through the long-dated investment cycle required to build their classifieds business if they were at the mercy of short term-focused stock market investors, and so the control structure is positive for the company in the long term,” Preston notes. “On the other hand, shareholders have no real way to reign in management if they disagree with their strategy.”

Preston also points out that while corporate governance standards generally argue that dual share classes and management control structures are undesirable, there are examples in South Africa where these have been very successful.

“The experience in the South African market has generally been that investing in businesses where the founders and/or management maintain control has been very lucrative,” he says. “Naspers, the PSG stable, the Remgro stable, the Wiese stable, have produced some of the JSE’s best performers.”

However, there are also instances where this hasn’t worked out so well. African Bank is the most obvious, while Altron and Pick n Pay have also not always been exemplary performers.

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