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Naspers: what next for South Africa’s most important internet company?
- Naspers’ marketcap recently went past the R1-trillion mark, making it Africa’s most valuable company
- Much of its success comes from a 2001 investment in Tencent, begging the question: what next?
- Why has it battled to find real organic success?
- Does its next big investment lie in India or Silicon Valley?
- Under CEO Bob Van Dijk, outlook is more global
Right now Naspers is an unstoppable juggernaut. On 31 May, its market cap went past the R1-trillion mark, with its shares touching a record high of R2314.98 per share.
That means it’s currently worth more than the South African GDP and is officially the most valuable company in Africa.
The tale of how it got to this point — from its origins as a nationalist newspaper publisher in Apartheid South Africa to global media and internet behemoth — is a well trod one. Under the leadership of Koos Bekker, its CEO from 1997 to 2014, it made a series of clever acquisitions into emerging markets internet companies. Some of those didn’t pay off. Others, such as OLX and Mail.ru did.
One investment though, has paid off far more handsomely than any of the others. In 2001, it bought a 46% stake in Chinese internet company Tencent (this would shrink to 34% after Tencent’s IPO). Back then wasn’t even profitable, but in the intervening years Naspers has earned back its investment many times over. Tencent itself is now worth more than US$208-billion and shows no sign of slowing down, having recently acquired Clash of Clans creator Supercell for US$10.2-billion.
But Naspers can only ride the Tencent train for so long before people start asking where its next big win will come from. Will it be built in-house or will the company have to rely on another Tencent-esque acquisition? And under the leadership of Bob van Dijk (Bekker is now company chairman) is management in the right space to find that next big win?
The inside option
Naspers’ stock price and market cap are both indicative of a company in rude health. Its latest financials, indicating US$12.2-billion in revenue at six-percent growth, for financial year 2016 (FY16) back that up.
But if you delve a little deeper, you start to see how dependent it is on internet companies it’s bought stakes in rather than built up from the ground. Naspers itself says as much in the financial report, crediting Tencent and its various ecommerce properties with growing its internet revenues 18% to US$8.2-billion. If your maths is a bit shaky, that means Naspers’ internet businesses now account for more than two-thirds of its total revenues.
Again though, the most successful businesses in that division are ones that it has acquired stakes in, rather than ones it’s grown itself.
Its showcase media property Media24 saw revenues decline 20% to just US$29-million, while its video entertainment division fell 11% to US$3.4-billion. The latter’s fall can at least partially be attributed to a strengthening dollar combining with the rapid weakening of currencies in many African markets to make content more expensive.
But given that video entertainment now includes Naspers’ Netflix competitor ShowMax, it’ll want to keep an eye on that number, especially as it looks to expand the service beyond South Africa.
While Naspers doesn’t put a number on how much it’s spent developing ShowMax to date it does reveal that, along with DTT in sub-Saharan Africa, it comprised the bulk of the current year’s development spend.
In plain language, it’s putting serious money into ensuring that the video-on-demand (VoD) service is a success. On a purely emotive level, you get the sense that Naspers needs Showmax to work and prove that it’s capable of building a world-class product from scratch.
If that is the case, it shouldn’t be too surprising: Naspers hasn’t always had the best success rate when it comes to starting and organically growing companies in the internet and tech space.
Perhaps the most infamous of its various failed attempts at building a world-beating internet product Search24, which was meant to “kick Google out of Africa”. But there were plenty of others too.
In 2011, for instance, it dumped all its own classifieds sites in favour of OLX, which it took a stake in the previous year.
Even Kalahari, which Naspers kept going for 16 years, couldn’t successfully grow beyond South Africa’s borders and eventually had to merge with Takealot, its main rival.
Hunting for unicorns
Small wonder then that Naspers has often looked to existing companies in emerging markets to fuel its owns growth. Tencent, Mail.ru, and OLX are probably the most high-profile examples of that expansion, but it’s also made major investments in India, South America, and Eastern Europe.
If the conglomerate to find its “next Tencent” in any market, India seems the most likely. This year, it passed the United States to become the country with the second-most internet users in the world.
There’s evidence that Naspers feels this way too. The company’s long had a presence in India, through investments in the like of Ibibo (which later absorbed the RedBus group of companies). While Ibibo seldom features as a headline earner in Naspers’ financial reports, it is increasingly profitable. Indeed Naspers’ was confident enough in Ibibo’s travel venture to pump R3.9-billion into it earlier this year.
Tellingly, it’s also been an investor in Flipkart, the company at the spearhead of India’s startup revolution since 2014.
But it, like a number of India’s biggest internet companies, is struggling with growth.
With an online market that big though, it’s only a matter of time before an Indian company takes off on a global scale. And you can bet your bottom dollar Naspers is keeping an eye on any that have the potential to do so.
That’s not to say, of course, that Naspers has always got outside investment right either. As Bekker admitted to Memeburn in a 2011 interview:
We’ve made more mistakes than anyone else. What we typically try to do is get into something and ‘fail fast and cheaply’. We have also failed expensively. We created the second biggest ISP in Beijing in 1998 and we lost the battle there. We eventually lost US$80-million and had to fire people and close it down because of mistakes we made. We’ve failed quite a lot but if you’re going to fail, get into the market quickly, fail quickly and learn from it.
If anything, the stunning rise of Tencent has allowed it to make more of those big, bold mistakes.
As Arthur Goldstuck, the renowned South African technology analyst, told us an an email interview, Tencent allows “Naspers to leverage its value in order to make daring acquisitions globally, which may not have been possible without the value Tencent builds into its share price”.
BizNews founder and veteran finance journalist Alec Hogg agrees.
“With the Tencent stake worth about as much as the Naspers market cap, the rest of the business is a bit of an add-on right now,” he told Memeburn. “But they are still important from a cash generating perspective and that is important as Naspers funds its strong growth ambitions”.
Setting up in Silicon Valley
Those growth ambitions are no longer limited to emerging markets either. Earlier this year, it opened up an investment office in Silicon Valley — the more traditional home of unicorn startups.
It’s already made investments there too, most notably pouring US$100-million into classifieds app LetGo.
According to Goldstuck, the Silicon Valley office is “more a matter of ‘it’s about time’ than ‘why are they doing this?'”.
“For a company like Naspers, which is continually on the lookout for strategic investments in the digital world, it is essential to be plugged into the start-up hubs like Silicon Valley, New York and Tel Aviv,” he told Memeburn.
“It means that it will be closer to both start-up activity and break-out activity, i.e. it will be part of the conversation when fast-growing tech companies go on the lookout for investors or stakeholders. It will also develop a radar for potentially significant acquisition activity that could inform its own acquisitions in other markets”.
While the Silicon Valley office is undoubtedly overdue, it would be a mistake to see this as a big shift in strategy instigated by Van Dijk. Speaking to TechCrunch, Naspers Ventures CEO Larry Illg made it clear that emerging markets startups are still very much part of its strategy and that its Silicon Valley office might actually be used to accelerate their growth.
“We’re looking to support existing companies that aren’t in the US but that want to attract talent here and potentially bring their models here, as well,” he said.
Management
Make no mistake though, there have been changes under Van Dijk. Some of those have come out of necessity: being based in the Netherlands, Van Dijk simply cannot be as omnipresent and hands-on as Bekker was. The former CEO had a fierce reputation for keeping an eagle eye on every aspect of the business. Among senior management, the moniker “KSS” (standing for Koos Said So) became a popular form of shorthand for explaining why business decisions were made.
It’s also worth remembering however that Van Dijk was never really part of Naspers’ original succession plan. As then Memeburn columnist Hilton Tarrant noted in 2014, “Antonie Roux (head of its internet businesses) was the heir to the Naspers throne. His unexpected death in June 2012 upended the original well-thought out and considered succession plan”.
Van Dijk then would have had to much to prove when he came onboard. Despite Bekker describing Van Dijk, who was instrumental in growing eBay‘s European operations, as the “best ecommerce man in the world”, stepping into a role that was always destined for someone else can’t have been easy.
But there are signs that he’s already made his mark. With Bekker and his hand-picked team at the helm, Naspers always felt like a South African company (albeit a very big one) with global operations. While the company is still listed on JSE (and is unlikely to de-list any time soon), under Van Dijk it increasingly feels like a truly global company with global aspirations.
Goldstuck concurs. “It was always a little surprising that Naspers would continue to be run from Cape Town when most of its action is in Asia and Europe,” he told us.
“One could say that its most complex operations as well as its areas of organic growth are in Africa, and that it requires a far more hands-on operation out of South Africa. However, most of its market cap is being generated in the Northern Hemisphere, so that’s where one expect the locus of power to move”.
“The truth,” Goldstuck said, “is that Naspers is a truly international business from an executive point of view, with senior executives based in the Netherlands, Hong Kong and South Africa, and it is likely to retain that approach while it is expanding acrosss the globe”.
