Veteran money manager Piet Viljoen has been on the warpath against Naspers management in the run-up to Tuesday’s release of the group’s financial results. He ripped into them in a social media post, which sparked an interview with Alec Hogg where the manager of the Merchant West Value Fund elaborated on his views. Viljoen is not alone. A couple years back, a group of South African money managers issued an unprecedented public statement attacking management’s approach. Given the impairments that will be disclosed with the results on Tuesday, those critical voices are likely to be heard again in the week ahead. – Alec Hogg
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Relevant timestamps from the interview
00:55 – Piet Viljoen on the millionaire Magnus vs Piet challenge
04:09 – On his comments on twitter regarding Naspers
07:21 – Naspers false trade statement
11:40 – Destroying shareholder value
13:45 – Lightning doesn’t strike twice rather distribute to shareholders
16:00 – On what’s likely to come through next Tuesday
16:57 – On food delivery and classified advertising likely being taken out of the portfolio
18:06 – On being proven wrong in the long term
20:45 – End
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Edited transcript of the interview:
Alec Hogg: Well, over the years, Piet Viljoen and I have had many conversations in interesting locations, but I haven’t seen him as outspoken as lately. So we’re going to find out why today. Piet’s Twitter account (@pietviljoen) is something to behold (see his tweet on Naspers below). He really does speak his mind. But today, our focus is on Naspers. Piet believes that the management team is more focused on serving themselves than serving shareholders. Let’s dive into that. Pete, you manage the Merchant West Investments Value Fund and are participating in our million Rand Magnus v Piet (Offshore v Onshore) Challenge. How’s that going for you, Piet?
Piet Viljoen: Five years is a long time. t’s been 18 months since we started this challenge, and it has had its ups and downs. But what gives me confidence is that the returns from investments are primarily determined by the price you pay when you make the investment. Currently, the price of South African stocks is quite low, and cheap assets generally provide good returns. That’s where we are in South Africa right now, and I believe it will only get better.
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Alec Hogg: That’s good to hear. You’ve always emphasized the importance of not losing money in investing, and it seems like you’ve been successful so far. Meanwhile, Magnus’s offshore portfolio has experienced volatility. But let’s talk about your Twitter account. You’ve made some strong statements about various topics. For example, you criticized the management team at Naspers and accused them of serving themselves rather than shareholders. Care to elaborate on that?
Piet Viljoen: Absolutely. Naspers has a complicated corporate structure with massive cross-holdings between companies. The whole structure seems to be based on their initial investment in Tencent, which turned out to be incredibly successful. However, they’ve made questionable decisions since then. They’ve invested a significant portion of their funds into start-up ventures that are mostly losing money and have questionable value. Recently, they had to admit that the values of these assets are lower than they previously believed, resulting in impairments. Moreover, they are now selling Tencent shares to buy more of these venture capital assets, which seems like a poor decision. The whole situation raises concerns about their capital allocation and the value they are creating for shareholders.
Alec Hogg: I see your point. It’s not the first time we’ve heard criticism about Naspers’ investment choices. They have claimed significant growth in these start-up businesses in the past. However, recent trading statements suggest otherwise. It seems like they may have overvalued these assets, and the losses are becoming evident. Can you provide some examples?
Piet Viljoen: One notable example is the OLX Auto online business. Naspers acquired it for $1.1 billion, but it has been operating at a loss since then, with cumulative losses of significant magnitude. They are now selling it for $700 million, showing that it hasn’t grown as expected. There are other assets in their portfolio with uncertain values, and it’s difficult to determine their true worth. Naspers’ management is now starting to realise that these investments may not be worth as much as they initially believed.
Alec Hogg: It’s reminiscent of other tech companies that faced similar situations in the past, where investments didn’t live up to expectations. Reminds me of the Jeff Liebesman saga with Corp Capital. It seems like Naspers may have fallen into a similar trap. But why hasn’t there been more pushback from shareholders or a change in management if these issues persist?
Piet Viljoen: Well, it’s hard to say. I don’t understand the remuneration policy. It’s very complicated. I know management are well remunerated. The problem I have with the remuneration is that what drives it, is the share price. And the share price reacts to all sorts of things. But the capital allocation is poor in terms of taking cash from Tencent and allocating it to startup venture capital. It’s as if they’re throwing the dice and hoping to get another Tencent.
Tencent is a once-in-a-lifetime, once-in-a-world-lifetime outcome. Even if you throw the dice a million times, you’re not going to get it again. So it seems to me from the impression I get, that’s what they’re trying to do. They’re trying to throw the dice, spread out the money, and see if they can come up with another Tencent. This has really failed. It hasn’t happened, and it’s highly unlikely, the odds are stacked against them.
And the worst thing about it is now they are selling Tencent shares, the jewel in the crown. They’re not just taking the dividend, they’re selling Tencent shares and using that cash to effectively buy more of these venture capital assets. They’re selling Tencent shares, taking that cash, and buying Naspers shares plus these venture capital assets, which no one knows their worth. They are loss-making and have added no value. So they are actually just taking that cash flow and incinerating a portion of it. And in the process, there are lots of costs involved. Investment bankers get paid a lot of money. There’s lots of troughs and snouts in the troughs in this one. So it is very well defended in the market. Nobody will ever criticise this. There are too many livelihoods that depend on this thing continuing, not only the livelihoods of the management of Naspers but also all their helpers and advisors.
Alec Hogg: I remembered one of the Berkshire Hathaway annual general meetings, Warren Buffett spoke all about these helpers and the super helpers. In other words the intermediaries between the shareholders and the companies and the way that often they destroy shareholder value. What you’re saying is that there’s a classic case of that having happened here?
Piet Viljoen: Yeah, over the past four or five years, the share price of Naspers is basically flat. Since the listing of Prosus, the share price in euros is lower than it was when it listed. So there’s no value being added, apparently. But there are a lot of helpers that are getting very rich from advising the management team. And the management team itself is getting very rich.
Alec Hogg: That doesn’t seem to make a lot of sense in a capitalist system where shareholders should be voting bad managers out or managers who are being excessively paid out. Why isn’t that happening in Naspers’ case if what you’re saying is correct?
Piet Viljoen: Well, Naspers shares are non-voting shares. All the votes sit with a control structure, which is unclear. One doesn’t know exactly who controls it. But if you buy a Naspers share, you buy a non-voting share.
Alec Hogg: So what’s happened here, again, getting back to your story of Naspers and Prosus, Koos Bekker and the late Antoine Roux made a heck of a bet in 1990 in buying 50% of Tencent $32 million dollars. At that stage it was a startup in Hong Kong. It was like buying Google before it got famous.
Piet Viljoen: It’s one of the best investments ever.
Alec Hogg: I think the guys from Sequoia said that it was the best private equity investment ever. So that confirms what you’ve said now. And it’s been a case of, look, we made the investment, we made you guys rich. Now just shut up. We know what’s best. But what you’re saying is they perhaps should have listened in the first place and said, it was a lightning. Lightning doesn’t strike twice. Let’s rather distribute all of this cash to shareholders. Is that what you’re agitating for?
Piet Viljoen: Yes, let’s rather unbundle Tencent’s shares. Let’s give shareholders what they earned with Tencent. Unbundle Tencent and get rid of all these helpers and advisors and managers who are taking the cash flow from Tencent and wasting it on speculative ventures.
Alec Hogg: But they did okay in India with Flipkart, you remember. They made $1.6 billion on that.
Piet Viljoen: Yeah.
Alec Hogg: So that would have made them feel like, hmm, you know, we can win sometimes when rolling the dice.
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Piet Viljoen: Yeah, when you roll the dice, sometimes you’re going to win, but at the end of the day, the house always wins. When you walk into the casino, the house always wins. You can roll the dice. The more times you roll the dice, the more the house wins. But sometimes your numbers will come up and you’ll win something. So it’s no surprise that these guys have spread the love around the world a lot. It’s no surprise that every now and then a winner comes up. But if you look at the portfolio of assets in total, what has contributed… And now it’s being marked closer to the approximation of fair value. I don’t think that is. In fact, if they had just held on to Tencent or unbundled that to shareholders, not done any of this, I think shareholders would have been a lot better off.
Alec Hogg: But the fact is that they have been buying back shares and that, according to management, has added huge value to the Naspers share overall worth.
Piet Viljoen: Well, yes, I think the announcement says it’s added $29 million of value. Remember, where does that value come from? It comes from the discount at which the shares are trading at, closing that discount. Why is it trading at such a discount? It’s because of management actions of investing into these venture capital type firms that no one knows what they are worth, but they’re loss-making, that’s the one thing you can see. So management creates the NAV and then does the buyback and reduces the discount to NAV to maybe 40% and says, “Look how much value we’ve created” Well, all they’ve done is they’ve reduced the amount of value they’ve destroyed. That’s all that’s happened. They’ve reduced the amount of value destroyed, but the value destruction is still a significant amount of value.
Alec Hogg: You can’t really blame them for what happened with Mail.ru in Russia after the Russian invasion of Ukraine with Mail.ru, but are other Mail.ru-type investments likely to come through when the results are released on Tuesday?
Piet Viljoen: Most probably. I don’t know. I’m not that familiar with the venture capital portfolio. All I know is the VC world – and their portfolio will be no different from other venture capital portfolios elsewhere in the world – the write-downs have been significant, and there have been a lot of zeros.
Alec Hogg: Regarding classified advertising, it appears that it’s being removed from the portfolio. As for food delivery, it’s a challenging market segment where Naspers could have faced significant troubles. If we recall, there was a contested takeover to acquire Just Eat, which Naspers lost. And I suppose they’re probably not saying, “Thank heavens for that,” as it could have cost them a few additional billions.
Piet Viljoen: Yes, indeed. In the food delivery area the future is uncertain. It’s a tough market to generate profits in. Thus far, they haven’t been successful in making money. They are a major player in that market, but whether it will work out or not is unknown. The straightforward approach would be to separate it out. Let shareholders decide for themselves whether they want to be involved in that sector. If there’s uncertainty surrounding it, the best course of action would be to unbundle the Tencent shares and allow investors to evaluate the venture capital assets on their own merits.
Alec Hogg: Perhaps there’s an alternative perspective on this. Shareholders often prefer short-term returns and frequently move from one investment to the next. However, building a business for the long term requires taking long-term bets, which sometimes take years to yield results. Imagine, for instance, if Naspers had sold or unbundled Tencent during the early stages when people were urging them to do so. Don’t you have any sympathy for the view that they might be proven correct in the long run?
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Piet Viljoen: Yes, definitely. Again, it’s entirely possible that some of their investments will perform exceptionally well in the long term. However, the process of separating these assets is straightforward. They can be listed as separate entities, and it wouldn’t take them away from the shareholders. For example, if you own one process share today, and they give you a Tencent share along with the venture capital portion, you still own the same thing. You just own two different entities representing the same underlying asset. Then you can decide whether to retain both, sell one, keep the other, buy more of one, buy more of the other. The choice would be yours, rather than being forced upon you by management with their own vested interests.
Alec Hogg: Additionally, unbundling the Tencent shares would immediately close the discount, which is still quite significant, around 40%. On a final note, there is a South African business within the portfolio called Media24. Although it doesn’t play a major role in the Naspers landscape, it’s worth mentioning. In 2022, it generated $250 million in revenue and made a profit of $6 million, a small improvement compared to the previous year’s loss of $8 million. While it may seem out of place in Naspers’s current situation, it holds historical significance as the origin of the company.
Piet Viljoen: I have two observations regarding Media24. Firstly, it’s making a profit, which is more than what many other businesses within the Naspers portfolio can claim. That’s a positive aspect. Secondly, in terms of Naspers’ net asset value, Media24 represents less than half a percent. It’s a negligible portion, but it carries emotional significance as it is where Naspers originated from. I believe there’s a sentimental attachment to it, which explains why it hasn’t been closed down or sold. Ultimately, it doesn’t have a substantial impact either way.
Alec Hogg: So having Media24 doesn’t really matter. One could argue that it’s a small indulgence for the chairman, considering he did such an amazing Tencent acquisition, shareholders tolerate it.
Piet Viljoen: That’s quite possible.
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