Naspers Scours Emerging Markets to Replicate Success of Tencent Investment

Source: Bloomberg

Naspers Ltd., whose $32 million bet on Tencent Holdings Ltd. has swelled in value to more than $14 billion, aims to replicate that success by scouring emerging markets where the two companies are jointly the biggest Internet investors.

Naspers, South Africa’s biggest media company, and Shenzhen, China-based Tencent jointly invested $688 million this year in Mail.ru Group Ltd., the Russian e-mail company that owns parts of Facebook Inc. Tencent has also followed Naspers in investments in India and Thailand, and said it’s considering further opportunities with its biggest shareholder.

The alliance combines Naspers’s experience in investing overseas with the financial muscle behind Tencent’s 637 million user accounts as they search for budding dot-coms. That may give them an edge for their next purchase in the fastest-growing regions of the worldwide Web as Google Inc., the world’s most acquisitive Internet company, focuses on U.S. acquisitions.

“Naspers has been very successful for a long time investing in markets that established western investors have ignored,” said Bill Bishop, a Beijing-based independent media consultant. “Naspers created on its own an incredibly powerful portfolio across the developing world that fits well with Tencent’s own plans for going out of China.”

400-Fold Increase

The ties stretch back to 2001, when Naspers bought 46.5 percent of Tencent for $32 million. That made Naspers the largest shareholder in what was then a three-year-old company offering a Chinese instant-messaging service called QQ to 18 million customers.

Tencent rose 1.2 percent to HK$182 at the 4 p.m. close of trading in Hong Kong, giving the world’s third-largest dot-com company by market value, a capitalization of HK$334 billion ($43 billion). The value of Naspers’ stake, now diluted to less than 35 percent, has since jumped to more than $14 billion.

Naspers targets companies with strong, entrepreneurial management, rather than start-ups, said Antonie Roux, head of the Internet operations and a member of Tencent’s board of directors. Rather than controlling investments, Naspers prefers to offer access to expertise from its “confederation” of holdings, he said.

“We don’t micromanage these guys,” Roux said in a Dec. 2 interview. “That’s why we haven’t lost one single entrepreneur founder.”

Latin America, Asia

The African media group also has stakes in more than 50 Internet companies across Africa, Asia, Europe and Latin America, according to Naspers Chief Executive Officer Koos Bekker.

Naspers spent 4.57 billion rand ($669 million) on purchases in the six months to September, including $388 million in Mail.ru, $144 million on OLX Inc. for its classified-ads business in Latin America and $44 million in Multiply Inc. for its online shopping in Southeast Asia.

All of Tencent’s disclosed overseas purchases have involved its African partner. In 2008, it bought a stake in a Naspers subsidiary in India. This year, Tencent bought 10 percent of Mail.ru for $300 million and 49.9 percent of Sanook, a Naspers unit in Thailand.

While Naspers and Tencent pursue assets in emerging markets, larger U.S. companies may be missing out, according to Bishop.

Google spent $1.6 billion buying more than 20 companies, mostly in the U.S., in the first nine months of the year, according to regulatory filings.

“We look at acquisitions across the entire globe, but probably there are more in the United States,” said Alan Eustace, who serves as a member of Google’s operating committee with founders Sergey Brin and Larry Page.

No Expatriates

Not all investments by Naspers have been successful. It entered China in 1998, setting up an Internet service provider. After failing to earn a profit, the company shut the business in 2001. The experience taught the company to use local managers because they are more knowledgeable than expatriates, according to Naspers.

“We don’t place any expats in any of our businesses,” Roux said. “Zero. Not a single one.”

With Tencent, Naspers doesn’t mind keeping a secondary role because of its confidence in Chairman Pony Ma Huateng and President Martin Lau, CEO Bekker said.

“We make a contribution but we don’t control or we don’t lead it,” Bekker said in an interview last month. “We are quite happy with that structure.”

Ma and Chief Technology Officer Zhang Zhidong were among the dozen founders that started Tencent. At least four of them were 1993 graduates of Shenzhen University, according to the company’s website.

$2 Billion War Chest

As the number of QQ accounts surged, Ma began offering add- ons such as a game portal in 2003, a social networking service in 2005 and a payment system in 2006. The company went public in Hong Kong in 2004 and the stock has since jumped almost 50-fold.

Tencent plans to gradually expand internationally, Lau told investors in May. The company was armed with a war chest of more than $2 billion in cash and equivalents as of Sept. 30 that could be used for acquisitions.

“We will leverage the strong rapport we built together to further explore opportunities in emerging markets,” Tencent said in an e-mail.

Naspers also relies on Tencent for investment advice in China.

“How are we ever going to understand the Chinese market as good as they’re going to understand it?” Roux said. “If they don’t want to do it, we won’t do it.”

Still, Naspers expects U.S. companies will increasingly follow their strategy of investing in emerging markets.

“While people, even five years ago, pooh-poohed places like Brazil or China, today they are taken seriously,” Bekker told investors on Nov. 30. “Competition for good assets will increase.”