Letgo, the USA/Spanish shopping app for second-hand products, received $500 million in funding commitment from Naspers at an undisclosed valuation last week. Founded in 2015, Letgo raised nearly $1 billion already, the majority of which from Naspers. Letgo’s ownership is separated between the USA and Europe, but it now seems likely Naspers’ effective overall ownership exceeds 50%, alongside venture firms like Insight, Accel, Northzone and many others.
Meanwhile, competitor OfferUp is seeking $150 million in funding. Competition is heating up among startups going after US$300bn in unused goods in U.S. households alone (data by Forrester, via Naspers). Letgo and OfferUp are going head to head (according to comScore data). Both are mobile-first apps with a focus on convenience. The apps categorize postings automatically. The massive amounts of capital required to enter into this market reaffirm just how entrenched Craigslist is. This is generally seen as a winner-takes-all market, hence Letgo and Naspers are going all-in.
While OfferUp and Letgo are both still free, the revenue potential is big: online classifieds could generate $40-50 billion in revenues by 2020, according to a famous Goldman Sachs report from 2015. Profit margins can easily exceed 50% in matured markets. Facebook is making an effort to enter the market too. Online classifieds is currently dominated by 6 global players (the big six), plus numerous strong local players (think of Rightmove, Zoopla, MercadoLibre, Idealista).
Naspers is keen to find another big market opportunity that it could develop into a multi-billion business. Indeed, it is one of the world’s most active corporate investors, ranked fourth corporate in Dealroom’s European investor prominence rank. A closer look at the company explains why.
South African Naspers was founded in 1915 as a publisher and printer of newspapers and magazines. It was then called De Nationale Pers (in short, Naspers). The company developed into a media conglomerate when in 1985 it moved into the pay-TV business, through M-Net which became a leading pay-TV service in Sub-saharan Africa.
In 1994, Naspers went public, at a valuation of roughly $200 million. In 1997 it founded internet service Mweb. That same year Koos Bekker was appointed as CEO, after successfully leading the pay-TV business. In 2001 Naspers (with Koos Bekker as CEO) invested $32 million in Tencent for a 46.5% stake. This deal may be one the best investments ever, as Tencent subsequently became China’s leading internet company (alongside Alibaba) and is now worth nearly $500 billion. At the time however, the dot-com bubble had just burst and Tencent was an unprofitable Chinese operator mainly known for instant messaging platform QQ.
An acquisition & investments spree
The Tencent deal arguably gave Naspers the confidence to pursue many more internet deals. In January 2007, Naspers acquired 30% shares of Mail.ru Group for $165 million. Today Naspers’ 28.7% stake is valued at about $1.5 billion on the Russian stock market (Mail.ru Group owns and operates multiple Russian internet assets including Mail.ru and VK).
Then in 2010 came another defining investment, when Naspers acquired a majority stake in global classifieds player OLX for a rumoured $40 million price. OLX had been founded four years earlier (2006) as the eBay and Craigslist alternative for the world outside of the United States, by Fabrice Grinda and Alec Oxenford. OLX raised at least $28.6 million from venture firms Bessemer, DN Capital, General Catalyst, Nexus, Founders Fund and Nexus and made several acquisitions in emerging markets. Naspers turned OLX into its main brand for global online classifieds. In 2014, Naspers increased its stake in OLX to 95%. Since then, Naspers has re-branded many of its global classifieds assets to OLX.
In 2015, Naspers acquired a majority in Avito and became the biggest investor in Letgo, thus consolidating its position as a global classifieds leader. Some of the founders have Letgo previously founded OLX.
Between 2014 and 2018 Naspers also made numerous venture investments such as SimilarWeb, Frontier Car Group, Udemy, Brainly, Codecademy, Twiggle, Kreditech and others. In 2017 Naspers became the biggest investor in the global food delivery marketplace Delivery Hero.
Naspers investments are too many to capture in one blog post but you can find most of them on Nasper’s Dealroom profile. But Naspers has been a successful investor: even excluding Tencent, Naspers claims an unrealised investment return of 17% (IRR) and 2.2x on all investments (including disposals) and investment return of 23% 2.2x IRR on its current portfolio.
Naspers’ problem: discount to net asset value
As the previous chart showed, Tencent has been responsible for most of Nasper’s value increase since 2001. Indeed, Naspers’ stake in Tencent is worth more than Naspers itself. In addition, Naspers owns many other big public stakes (Delivery Hero, Mail.ru), classifieds assets, pay TV and newspaper assets. The below chart shows the discrepancy even more clearly.
So why is Naspers trading at a discount to the sum of all its assets? Two main reasons:
First, Naspers is basically too big for the Johannesburg stock exchange. This a rather technical issue: a statutory limitation for certain big institutional investors, but with a real impact. The company has tried to address this by extending its UK and US ADR program (i.e. share certificates), but this had little effect. A secondary listing in Hong Kong has been suggested by analysts, and could provide access to additional pools of capital. This would also limit part of the FX translation risk with Tencent.
Second, shareholders are not happy about Naspers’ governance. Due to a complex voting control structure (see below), Naspers’ free float is about 84% but its vote adjusted free float is only 28%. Naspers says that the aim of its voting control structure is to ensure the continued independence of the group, and that this is vital to its investment strategy as it can assure regulators and other of its continuity and identity.
Notably, taxation should not be an issue as the capital gains on Tencent are tax free.
There are many steps Naspers could take to reduce the discount, including more drastic measures like creating a tracking stock of its Tencent investment, or even a complete de-merger. In July, Naspers’ CEO Bob van Dijk said considers listing some businesses separately to reduce size on the South African stock market.
Naspers’ position & strategy today
In March 2018, Naspers sold 2 percent of its holding in Tencent (for the first time) for about $10 billion to invest in these three areas. Naspers’ cash position is currently about $8 billion. Naspers said it had no plans to further reduce its holding for the next three years. Most of its eCommerce activities (Allegro and Flipkart) have been sold, both at a significant profit (Flipkart at 3.6x and Allegro about 1.6x). Naspers would probably sell eMag if it found a keen buyer.
For its Pay TV business, focus lies on profitability.
The proceeds are used to invest in its three focus areas: Online Classifieds, Food, and Payments.
In classifieds, OLX turned profitable last year and growing revenues about 30%+. That excludes Letgo where heavy investment is obviously taking place.
What can we expected from Naspers? The company will take some steps to narrow the valuation gap: pursue a dual listing in Amsterdam or Hong Kong? List some assets separately?
It also makes sense to make big bets that are able to “move the needle. Letgo fits this criteria, as we’ve seen above. How big is the US marketplace opportunity? eBay’s USA marketplace is worth about $30-40 billion alone: this is an indication for how big Letgo could be.
Big investments can also be expected in food or fintech.
More Dealroom research on the state of marketplaces and classifieds coming soon!