Naspers' Tencent share sale a smart move - Moody's

Cape Town - The reduction of its stake in Tencent is credit positive for Naspers [JSE:NPN], ratings agency Moody's said on Monday.

Last week Naspers announced it had reduced its stake in the Chinese internet giant from 33.2% to 31.2% via an an accelerated offering to investors, raising $9.8bn. 

Moody's currently rates Naspers at Baa3 stable, one notch above sub-investment grade. Tencent is rated at A1 stable, which indicates "low credit risk".   

The ratings agency said in a research note on Monday morning that the share sale was a smart move by Naspers. It would strengthen its balance sheet and help fund the scaling of its core e-commerce operations, as well as help it pursue new acquisitions without incurring more debt.  

"The proceeds increase Naspers’ cash balances to around $12.8bn from $3bn as of 30 September 2017, and puts the company back into a net cash position of around $8.1bn after deducting $4.7bn of adjusted gross debt , including transponder leases," said Moody's. 

Since investing in Tencent in 2001, Naspers had not sold any of its shares before last week's sale.

Naspers CEO Bob van Dijk told Fin24 on Friday that the most important goal the company hopes to achieve with its sale of 190 million shares in Tencent is to accelerate and scale its e-commerce businesses.

He said Naspers was still bullish about the Chinese internet giant. But the group also wants to explore new opportunities in its other online businesses. 

Capital gains tax

Moody's said Naspers expects the capital gains tax liability on the $9.8bn proceeds of the sale to be minimal. It would be applicable to the extent that SA investors participated in the Tencent share sale.

"We do not expect Naspers to use the proceeds to reduce debt, given its long-dated debt maturity profile at competitive funding rates, with the next bond of $1bn and its $2.5bn undrawn revolving credit facility maturing in 2020. Instead, we expect Naspers to redeploy the capital into new growth opportunities," commented Moody's.

"Although the timing and magnitude of future acquisitions or investment demands from its existing operations remain unclear, based on historical capital demands, we expect that the sizable cash balance and undrawn $2.5bn revolving credit facility will alleviate the need to raise additional debt for some time."

For Moody's, the disposal shows Naspers’ preference and willingness to monetise valuable investments instead of increasing debt.

"It is consistent with our expectation that Naspers will maintain a prudent financial policy against a growth strategy that requires a high initial capital investment to broaden its reach and entrench its market-leading positions in its core e-commerce businesses including classifieds, food delivery and financial technology," said the ratings agency.

Naspers' remaining 31.2% stake in Tencent still has significant value of about $155bn, or R1.8trn, at current market prices.

When combined with Naspers’ other listed investments in Group ($2.2bn), Delivery Hero AG ($2bn) and MakeMyTrip ($1.1bn) it would cover the company's reported debt obligations by more than 46x, or by 34x using Moody’s-adjusted gross debt.

"We estimate that there will be a negligible effect on Naspers from the reduced dividend inflow from Tencent as a result of the smaller stake," said Moody's.

Bloomberg, meanwhile, reported on Sunday that Naspers, "frustrated that investors give it no credit for its investments other than a stake in Chinese internet behemoth Tencent Holdings", is considering listing some businesses on the stock market to highlight their value. 

Meanwhile, late on Friday night Moody’s affirmed South Africa’s long term foreign and local currency debt ratings at Baa3, and revised the outlook to stable from negative.

A downgrade by Moody’s to sub-investment grade, or junk status, would have removed SA from the Citi World Government Bond Index, which would have forced many asset managers and pension funds to sell SA bonds, hiking the cost of debt.

* Fin24 is part of, a division of Media24, which is a subsidiary of Naspers.

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