© Reuters. FILE PHOTO: Bob van Dijk, CEO of Naspers and Prosus Group poses at Amsterdam’s inventory change, as Prosus begins buying and selling on the Euronext inventory change in Amsterdam, Netherlands, September 11, 2019. REUTERS/Piroschka van de Wouw/File Picture
By Toby Sterling, Promit Mukherjee and Abhinav Ramnarayan
AMSTERDAM/JOHANNESBURG (Reuters) -Prosus, Europe’s reply to SoftBank and its Imaginative and prescient Fund, is betting that its long-term investments can fill a yawning valuation hole and provides it the identical identify recognition as one of many world’s most aggressive expertise buyers.
Based mostly within the Netherlands, Prosus (OTC:) was spun out of South Africa’s Naspers in 2019 with a mandate to handle the spoils of a $32 million wager on China’s Tencent, now price $200 billion, on a 30-year funding horizon.
Japanese large SoftBank’s personal firepower is backstopped by its stake in Alibaba (NYSE:), which has its origins in CEO Masayoshi Son’s $20 million funding within the Chinese language e-commerce agency.
A banker who has labored with each Prosus and Softbank (OTC:) describes them as “the 2 world elephants on the market with large everlasting capital” for tech investments, and the rivals are additionally generally co-investors.
In a sign of its ambition, Prosus final month employed Ervin Tu, a managing companion at Imaginative and prescient Fund and a former expertise banker at Goldman Sachs (NYSE:), to move its group M&A.
Jean Pierre Verster, CEO of South African funding supervisor Protea, which holds nearly 10% of its fund property in Prosus, says Tu’s appointment “tells you that there is most likely going to be extra (M&A) exercise coming down the road”.
That’s already evident as since April, Prosus has made a dozen investments, final month asserting the $1.8 billion acquisition of software program developer platform Stack Overflow.
“We’ve vital capability on the steadiness sheet, and we additionally see actually good alternatives within the segments we function immediately,” Chief Govt Bob van Dijk advised Reuters, including that whereas Prosus at instances competed with SoftBank there have been vital variations between the 2 buyers.
Verster sees the Stack Overflow acquisition as an indication that Prosus might “get a bit extra aggressive”, though he expects the group, which owns a mixture of controlling and minority stakes in lots of tech companies, will stay extra conservative than Softbank.
MIND THE GAP
Prosus has not had straightforward trip in its first few years, with a sophisticated construction and working losses at most investments it has made, aside from Tencent, main it to commerce at a deep low cost to the worth of its property.
Its inventory market valuation is 25% decrease than the market worth of the 28.9% stake in Tencent it presently holds. At Naspers, which in flip controls Prosus, the low cost to its financial curiosity in Tencent is greater than 40%.
(For an interactive graphic, click on on https://tmsnrt.rs/3hD4Ukk)
Bob van Dijk, who additionally heads Naspers, says this low cost is transitory and buyers have executed nicely thus far and can proceed to in the long run.
“You simply have to look via (the losses) and the potential and the power of the enterprise mannequin is way more necessary than short-term profitability,” he mentioned.
A technique of narrowing the hole is by step by step offloading the crown jewels, and Prosus raised $15 billion by promoting a 2% stake in WeChat proprietor Tencent in April.
A 3rd of that may go to share buybacks as soon as a cross-holding construction with Naspers, has been arrange. Prosus shareholders are set to approve the deal on Friday.
Prosus says the true resolution to the valuation hole is discovering extra new investments and enhancing profitability on the previous ones till they rival and even eclipse the Tencent holding.
And that’s the reason the remaining $10 billion from its most up-to-date stake sale is being ploughed again into broadening the Prosus portfolio, which spans on-line categorised companies, fintech, instructional software program and on-line meals ordering and supply.
NO END GAME
Discovering the subsequent Tencent amongst tens of hundreds of expertise start-ups across the globe is the problem going through Van Dijk and his new SoftBank rent Tu.
Prosus invests in just one out of each 200 or 300 alternatives it critiques, Van Dijk mentioned, within the vary of sectors it is aware of nicely. The extra mature portfolio ranges from U.S.-based Codecademy, to Indian meals deliverer Swiggy, to Russia’s Mail.Ru to world market operator OLX.
Early stage investments are generated by a two-dozen individual enterprise arm, the place Banafsheh Fathieh is head of Americas. Investments of greater than $200 million undergo the Prosus board.
Fathieh, who works out of a small workplace in San Francisco, says her portfolio is a far cry from the Silicon Valley bubble.
“We’re a distinct model of enterprise capital. For those who’re taking a 30 yr standpoint, you possibly can go after entrepreneurs which have lifelong goals to construct firms that may final,” she mentioned in an interview.
Fathieh mentioned that what makes Prosus/Naspers distinctive is its willingness to spend money on entrepreneurs and companies it believes in, with out the 3-7 yr “exit plan” that frames most enterprise capital and personal fairness investments.
At Prosus/Naspers, Fathieh mentioned, “there is no such thing as a finish sport”.
FOOD FOR THOUGHT
Meals ordering and supply is an trade the place Prosus is clearly hungry for extra. Its preliminary 2017 investments in Supply Hero have tripled in worth and in March it paid 2.2 billion euros to extend its stake within the German agency.
One goal is iFood of Brazil, an organization that delivered 500 million meals final yr. Prosus owns a two-thirds stake, and co-owner Simply Eat Takeaway.com is trying to divest the opposite third for greater than $2 billion.
Such investments are delivering progress and for the yr ended March 31, Prosus reported income at its non-Tencent ecommerce companies grew by 46% to $6.2 billion.
Though buying and selling losses have been $429 million, Prosus’ web revenue together with Tencent practically doubled to $7.45 billion, underlining how a lot the stake nonetheless dominates outcomes.
“In the event that they develop at say, 30% per yr … I’m completely happy,” Protea’s Verster mentioned. “Any narrowing of the low cost is only a bonus.”
Analyst Ken Rumph of Jefferies (NYSE:), who charges Prosus shares a maintain, says the market low cost might persist after the cross-holding construction is in place as “buyers are postpone by the identical points they’d with Naspers,” together with a sophisticated management construction.
And the Tencent stake will lengthy outshine different administration actions, Rumph mentioned, including: “Even a continued 20% return on investments elsewhere within the portfolio will take years to shift the steadiness away from Tencent”.