SoftBank Prosus in Europe plays a long game to close the value gap


  • Investors and analysts say valuation gap may never close
  • Business mergers and acquisitions to accelerate under veteran Vision Fund
  • High tech industry pricing is not a problem – CEO of Prosus

AMSTERDAM / JOHANNESBURG, July 8 (Reuters) – Prosus, the European response to SoftBank and its Vision Fund, is betting its long-term investments can close a gaping valuation gap and give it the same name as one of the most popular technologies. the world’s most aggressive investors.

Based in the Netherlands, Prosus was spun off from South African Naspers in 2019 with a mandate to handle the loot of a $ 32 million bet on Chinese Tencent, now worth $ 200 billion, on an investment horizon of 30 years.

Japanese giant SoftBank’s firepower is bolstered by its stake in Alibaba, which originated in CEO Masayoshi Son’s $ 20 million investment in the Chinese e-commerce company.

A banker who has worked with both Prosus and Softbank describes them as “the two global elephants with massive permanent capital” for technology investments, and rivals are also sometimes co-investors.

A sign of its ambition, Prosus last month hired Ervin Tu, Managing Partner at Vision Fund and former technology banker at Goldman Sachs, at the head of its M&A group.

Jean Pierre Verster, CEO of South African investment manager Protea, which owns nearly 10% of his fund’s assets in Prosus, said the appointment of Tu “tells you that there will likely be more activity ( F&A) to come “.

This is already evident since since April Prosus has made a dozen investments, announcing last month the acquisition for 1.8 billion dollars of the software development platform Stack Overflow.

“We have significant capacity on the balance sheet, and we also see very good opportunities in the segments we operate today,” Managing Director Bob van Dijk told Reuters, adding that while Prosus was sometimes in competition with SoftBank, there were significant differences between the two investors. .

Verster sees the acquisition of Stack Overflow as a sign that Prosus could “get a little more aggressive,” although he expects the group, which owns a mix of majority and minority stakes in many tech companies, remains more conservative than Softbank.

BE CAREFUL OF THE GAP

Prosus (PRX.AS) did not have it easy in its early years, with a complicated structure and operating losses in most of the investments it made, with the exception of Tencent (0700 .HK), causing it to trade at a steep discount to the value of its assets.

Its market valuation is 25% below the market value of the 28.9% stake in Tencent it currently owns. At Naspers, which in turn controls Prosus, the discount on its economic stake in Tencent is over 40%.

(For an interactive graphic click https://tmsnrt.rs/3hD4Ukk)

Bob van Dijk, who also runs Naspers, says this haircut is transient and investors have done well so far and will continue to do so in the long term.

“You just have to look at (the losses) and the potential and strength of the business model is much more important than short-term profitability,” he said.

One way to close the gap is to gradually offload the crown jewels, and Prosus raised $ 15 billion by selling a 2% stake in WeChat owner Tencent in April.

A third of this sum will go to the repurchase of shares once a cross-shareholding structure with Naspers has been put in place. Prosus shareholders are expected to approve the deal on Friday.

Prosus says the real solution to the valuation gap is to find more new investments and improve the profitability of old ones until they rival or even eclipse Tencent’s stake.

And that’s why the remaining $ 10 billion from its latest stake sale is being reinvested in expanding the Prosus portfolio, which includes online classifieds businesses, fintech, educational software, and orders and shipments of. food online.

NO END OF GAME

Finding the next Tencent among tens of thousands of tech start-ups around the world is the challenge facing Van Dijk and his new recruit SoftBank Tu.

Prosus only invests in one in 200 or 300 opportunities that he reviews, Van Dijk said, in the range of industries he is familiar with. The more mature portfolio ranges from US-based Codecademy, Indian food deliveryman Swiggy, Mail.Ru in Russia and global market operator OLX.

The start-up investments are generated by a venture capital arm of two dozen people, where Banafsheh Fathieh heads the Americas. Investments of more than 200 million dollars go through the board of directors of Prosus.

Fathieh, who works from a small office in San Francisco, says his portfolio is far from the Silicon Valley bubble.

“We’re a different brand of venture capital. If you take a 30-year perspective, you can tackle the entrepreneurs who have always dreamed of building businesses that will last,” she said in an interview.

Fathieh said what makes Prosus / Naspers unique is his willingness to invest in entrepreneurs and businesses he believes in, without the 3-7 year “exit plan” that frames most investments in venture capital and private equity.

At Prosus / Naspers, Fathieh said “there is no endgame”.

FOOD FOR THOUGHT

Food ordering and delivery is an industry where Prosus is clearly hungry for more. Its initial investments in 2017 in Delivery Hero (DHER.DE) tripled in value and in March spent 2.2 billion euros to increase its stake in the German firm.

One of the targets is iFood of Brazil, a company that delivered 500 million meals last year. Prosus has a two-thirds stake and co-owner Just Eat Takeaway.com is looking to sell the other third for more than $ 2 billion.

These investments are driving growth and for the fiscal year ended March 31, Prosus said revenue from its non-Tencent e-commerce business increased 46% to $ 6.2 billion.

Although business losses were $ 429 million, the net profit of Prosus, including Tencent, nearly doubled to $ 7.45 billion, highlighting how participation still dominates results.

“If they grow up at, say, 30% a year… I’m happy,” Protea’s Verster said. “Any shrinkage of the discount is just a bonus.”

Jefferies analyst Ken Rumph, who rates Prosus shares, said the market downgrade may persist after the cross-shareholding structure is put in place because “investors are put off by the same issues they were having. with Naspers “, including a complicated control structure.

And Tencent’s stake will long eclipse other management stocks, Rumph said, adding, “Even a continued 20% ROI elsewhere in the portfolio will take years to shift Tencent’s balance.”

Reporting by Toby Sterling, Promit Mukerjee, Abhinav Ramnarayan; Editing by Rachel Armstrong and Alexander Smith

Our Standards: Thomson Reuters Trust Principles.


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