First in our Giants-of-the-JSE series: Naspers
A fabulous print-rag to digital riches story
As an investor potentially interested in buying shares in Africa’s growth story via the JSE, it is worth taking a look at which companies are local players and which serve non-African markets.
A number of the largest companies on the JSE are offshore giants. They may have had their beginnings here in South Africa, but now play only a minor role in the future of Africa, nor are their fortunes tied to Africa’s growth story. Amongst these are: British American Tobacco, BHP, Prosus, Richemont, Anheuser-Busch Inbev, and Glencore.
I’ve categorised these as ‘Offshore Giants of the JSE’ and will provide analysis in response to request and demand, but for the time being, analysis of these companies needs to make way for companies more central to growing wealth in Africa.
There is one exception however, the subject of today’s analysis - Naspers. This is a print-rag to digital riches story of fabulous proportions, and illustrates how we can think of a company through the FarSight model.
Naspers’ backstory
Naspers was founded in 1915 as a publisher of newspapers and magazines, and at one time dominated the Afrikaans speaking print media. The company had close ties to the Apartheid government, which gave it an uncomfortable legacy.
The name, Naspers, derives from the Afrikaans, Nasionale Pers, meaning National Press.
More recently, the company was reinvented in the hands of a visionary South African entrepreneur, Koos Bekker, who started his career in 1985 pioneering his version of and ‘HBO for South Africa’, called M-Net, a joint venture with Naspers. This pay-TV channel expanded quickly and eventually became the content provider for MultiChoice. DStv, the first direct-to-home digital pay-TV service outside the US became the company’s flagship product. Eventually, Naspers listed MultiChoice as a separate company on the JSE.
Taking Naspers four-dimensional
Leadership: On the back of this success, Koos Bekker became CEO of Naspers in 1997, negotiating a unique compensation package with the company, whereby he opted to forgo a traditional salary, instead being compensated solely through stock options that would vest over time. This arrangement speaks strongly to the first of the four dimensions of FarSight’s model, Leadership, which we define as competence and trustworthiness. Bekker had by this time proved his competence, probably his trustworthiness too, but with such a strongly incentivised compensation package, alignment with Naspers’ shareholder interests was well reinforced.
Purpose: Key to the FarSight model for value creation is the Purpose dimension, which encapsulates the strength of purpose and motivation of talent to commit to a proposition that has clear value for the company’s intended customers. Bekker put together two important insights, the rise of emerging markets, especially in Asia, and the potential in digital media, from his experience with M-Net and MTN.
Bekker’s strategy was to task Hans Hawinkels, then CEO of MIH Asia, with exploring investment opportunities in the Far East. Notwithstanding many unsuccessful investments, when Hawinkels reported on his engagement with Ma Huateng, the founder of Tencent, Bekker understood the potential and managed to convince Naspers’ leadership to invest $32 million for a 46.5% stake in Tencent in 2001.
Foundations: This underlines the importance of the third dimension of the FarSight model, Foundations, for Naspers had a strong balance sheet and the necessary war-chest to be able to make this considerable investment in Tencent.
Relationships: The last of dimensions of the FarSight model is that of Relationships. Here, Naspers trusted in Huateng’s leadership and in particular learned from its previous experiences where Western business models in the media industry did not resonate with consumers in the east. As a result, Naspers encourage Tencent to develop a business model that resonated with Chinese consumer preferences and with regulatory expectations.
In the 20 years following Naspers’ investment, Tencent grew phenomenally, being valued at around $560 billion in 2021 and seeing Naspers’ value grow in similar proportions. Having sold down a portion of its stake to fund other ventures, Naspers still owns roughly a quarter of Tencent, valued at around $130 billion USD.
2018: Naspers at a cross-roads
Foundations: By around 2018, Naspers had reached a cross-roads. Looking at its four dimensions, the company still had fantastically strong Foundations in the strength of its balance sheet and its holding in Tencent, though too much unemployed cash can lead to lower returns on capital employed.
Relationships: Cracks were beginning to appear in the Relationship dimension as the Chinese Communist Party introduced draconian measures to control and subordinate the likes of Tencent and Alibaba, as well as placing strict limits on tencent’s operations, in particular the local gaming market, which was rightly regarded as being highly addictive. Despite Ma Huateng managing Tencent’s relationship with the CCP adroitly (Alibaba’s CEO was not so lucky, disappearing from public for an entire year), it was clear that even the best management of the company’s relationships could never guarantee Tencent’s ongoing licence to operate with the commercial freedom it had enjoyed. Tencent’s survival seemed more of a lottery than a sure thing.
Leadership: While the Leadership dimension was still strong, Bekker was looking to withdraw from the frontline action. Meantime, Naspers’ price on the JSE reflected a value some 35 - 40% less than the value of its investment in Tencent, plus its other ventures, including MultiChoice and its core print-media business in South Africa, Media24. This is termed the discount to Net Asset Value (NAV).
Purpose: This exposed potential weakness in Naspers’ Purpose, the one FarSight dimension on which the future direction and strategy of any company is founded. What did Naspers stand for at this point in its life? Print media was clearly on its way out; the monopoly enjoyed by MultiChoice was under threat, and Tencent was a child that had become its own gigantic being, dwarfing its parent.
The Tencent formula becomes the business model
In response, Naspers decided that the same formula that made it so successful with Tencent, could be applied again, and it took steps to recraft itself as an investor backing the next class of entrepreneurs building world-class companies.
The transition period between 2018 and 2024 was, not surprisingly, a bumpy ride, especially as most Naspers investors were understandably skeptical that the company could ever achieve another smash hit such as it had with Tencent. During this period, Naspers unbundled MultiChoice and created a new entity, Prosus, listed on Euronext, aimed at attracting new, foreign investors. The highly complex manoeuvre was also aimed at creating the control structure required to reassure Chinese authorities that Tencent, regarded as of strategic importance to the country, could not be the target of a hostile takeover bid.
However, this new listing created dual voting-class shares at both Naspers and Prosus, potentially threatening minority shareholder rights. The new CEO’s remuneration package allowed him to benefit from Tencent’s further success, which was well outside his control. Taken together, these measures weakened Naspers’ Leadership dimension, as appraised by FarSight at the time.
During this period, Naspers and its parent was hit by Chinese Communist Party limitations on its products, the Covid-19 pandemic, and of course the Russo-Ukraine war, resulting in the company having to let go of one of its most promising ventures, Russia’s Mail.ru.
Sadly, Naspers shut down its South African venture capital business, Naspers Foundry in 2023. This coincided with the general pessimistic view of the SA economy and the lack of initiative on behalf of government to put more enabling conditions for small business in place. Since then, Naspers has expressed its commitment to supporting the SA tech sector in alignment with its core, global ventures business, rather than as a stand-alone programme.
Notwithstanding these challenges, this period, during which CEO Bob van Dyk was at the helm, did see a strong and clear Purpose emerging for Naspers as a backer of entrepreneurs and promising ventures in the digital space. By the time van Dyk departed in September 2023, Naspers had established promising ventures in Food delivery (iFood, Delivery Hero, Swiggy), Classifieds (OLX), Payments & Fintech (PayU, Remitly), Edtech and Etail (EMAG, Takealot).
Under pressure from investors for Naspers to show that these start-up businesses could convert from absorbers of capital to sustainable cash-generating businesses, the company has now recrafted its Purpose as not only an investor, but also as an operator, assisting its investments to become self-sustaining.
How does FarSight describe Naspers as an investment for the future?
Starting with Mohnish Pabrai’s dictum that advises us to invest in a business where “heads I win big, tails I don’t lose too much,” the first step in the FarSight analysis is to discover the potential in the business, both in terms of upside opportunity, and downside risk.
Learning about the business: Naspers operates in four core segments, Food Delivery, Classifieds, Payments & Fintech, and Edtech. These are fast-evolving industries at the cutting edge of technology, offering opportunities for innovation, but within a highly competitive environment. In these markets, there is often only room for one winner, requiring bold and deep investment to bring the business into a winning position. Winners, such as the US and China’s big tech companies, attract societal criticism, especially where they overreach, resulting in often-punishing regulation, even the threat of being broken up.
Headwinds and tailwinds in the external environment: Naspers’ business ventures are well diversified across global regions providing a hedge against failure in one region, such as happened to Mail.ru at the onset of the Russian invasion of Ukraine. Significant markets include China (Tencent), India, south-east Asia and Brazil. Until September 2024, China was in the doldrums, but a recent stimulus package by the government has improved the outlook for growth. All the other regions are growing strongly, though each has its own set of political and regulatory challenges. A significant development in the external environment has been the increased momentum in ESG regulations, in particular in the EU, which has mandated challenging environmental hurdles, specifically the reduction in carbon footprint.
Forces within: Naspers provides a detailed annual report in which key areas of information provide a sense of where the companies internal vulnerabilities may lie. For a company with so many underlying entities, a deep-dive analysis is necessary, so only a summary will have to suffice here. In essence, the key issues to appraise the company against are its clarity of purpose; the suitability of each businesses’ products and services; the depth and motivation of the company’s talent; the efficiency of asset allocation; the stability of technology systems, in particular to withstand cyber-attacks and retain privacy of customer information; the treatment of customers and responsiveness to their complaints and feedback; relationships with business partners and suppliers, as well as with host governments. Finally, the capability and trustworthiness of the new leadership, in particular to show genuine commitment to the company’s ethics, culture and values.
The FarSight appraisal
Having appraised Naspers over the past seven years, we have a long history against which to compare the company’s performance. We know the existing areas of strength and weakness. Leadership compensation had been misaligned in the van Dyk era and the governance structure convoluted; Purpose was clear, but fractured in pursuit of many ventures across many jurisdictions; financial Foundations have been strong, though with uncertain return on asset allocations (in new ventures not yet maturing), while tech support has consistently appeared strong and well described, though recent retrenchments to streamline the business may have taken a toll on morale. Areas of weakness and strength in Relationship exposure (China and Russia) and management have generally been transparently and frankly reported.
The key is to be on the look out for changes that we can detect, specifically in the past months to a year.
Leadership: Koos Bekker remains chairman of the board, though the executive has recently changed with the appointment of Fabricio Bloisi in July 2023, previously the CEO of iFood, a successful food delivery company in Brazil. The details of Bloisi’s compensation have not yet been disclosed, but recent updates suggest a strong focus on incentivising the maturing of Naspers’ various ventures, as well as reducing the discount to NAV (i.e. raising the price of Naspers’ shares to reflect the sum total of all the values of the constituent companies in its portfolio). Reporting provides reasonable assurance that the company’s values are strongly embedded in everyday business dealings across the group.
Purpose: Naspers enunciates its purpose clearly: Build technology leaders to address big societal needs in high-growth markets where we can build sustainable, leading positions. Naspers’ reporting provides a detailed description of its macroeconomic environment, technology, society and investor landscape, from which it has derived four strategic priorities:
Drive profitable growth in our core businesses, in both segments and regions showing potential for high growth. Thus: Food delivery, Classifieds, Payments and fintech, and Edtech, in China, India, south-east Asia and Brazil.
Expand local ecosystems with a strong local presence
Find new operating and investing areas for growth
Be a force for good, responding to shareholders, regulators and society increasingly interested in how seriously we take our responsibilities as a global technology group.
Foundations and Relationships: Naspers provides useful detail on the performance of each business segment, providing summary data on the company’s profitability (with trend data), Material stakeholder matters, Strategic focus, Value drivers, Opportunities and Risks. The narrative includes good context, including comparability with previous years.
In summary, FarSight’s view of Naspers is of a company with sound leadership and secure financial and technology foundations. The company has a clear purpose and appears to manage its relationships in a mature and responsible fashion.
While its underlying businesses operate in tough competitive environments where innovation can disrupt incumbents quickly, Naspers has diversified its holdings across a number of segments and geographies, reducing concentration risk, while mitigating against competition with a strong emphasis on the development of ecosystems that build stickiness and moat characteristics.
Naspers will not succeed with all its ventures, but the variety of chips on the table puts the company in the game and provides a decent hedge against catastrophic loss. the fact that it identifies capital allocation risk as the first on its list of material risks, suggests the company is aware of the importance of judging when a commitment can be deepened, and when it is time to divest. Knowing when to hold ‘em, knowing when to fold them…
Finally, If you are an investor specifically interested in companies deeply invested in Africa’s growth story, Naspers is not a lost cause. The company not only has interests in South Africa (for example the delivery service, Takealot), but also draws much of its talent from South Africa, which together with teams from across the globe, have built formidable strength in diversity. Note the new CEO is a prominent Brazilian entrepreneur!