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Market Consultation – 20191122 Market Consultation Naspers Prosus Capping
Market Consultation: Naspers and Prosus Capping
FTSE/JSE Africa Index Series
5 November 2019
1. Introduction
Following the September FTSE/JSE Index Series implementation of the Naspers capitalisation issue, various market
participants have reiterated concern regarding the resultant combined weight of Naspers and Prosus in the
FTSE/JSE Capped indices, specifically the Capped SWIX All Share index (J433), which has become the de facto
benchmark for local equity funds in South Africa. The reason for applying capping in indices is to reduce single
stock exposure. Since Naspers and Prosus are two separate companies, the capping is applied separately and their
combined index weight is thus in excess of the capping level of 10%. However, both companies draw a significant
portion of their value from an underlying holding in TenCent, and some index users believe that this should be
considered when capping their index weights.
2. Background
On 25 March 2019 Naspers announced its intention to form a new global consumer internet group ("Prosus")
comprising Naspers' international internet assets, and list Prosus on Euronext Amsterdam. Prosus also has a
secondary, inward listing on the JSE.
Prosus comprises all of the old Naspers' internet interests outside of South Africa including, among others, its
companies and investments in the online classifieds, payments, food delivery, etail, travel, education and social
and internet platforms sectors. Prosus is currently 74% owned by Naspers and has a free float of 9.91% in the
FTSE/JSE Index Series, based on the proportion of its shareholder base accounted for on the South African (Strate)
share register.
Although FTSE/JSE typically aligns the company free float for new foreign listings at the first quarterly review post
a spin off event, the free float for this event was estimated at the September review based on three key inputs:
* The published election results
* The resident / non-resident split of Naspers on the Strate Register as at the end of August, on the basis
that SA resident Naspers shareholders would receive their Prosus allocation on the Strate Register and
non-residents will not
* The Naspers cross-holding in Prosus is considered restricted and therefore excluded from the free float
calculation
On the same day as the Naspers announcement FTSE/JSE released an Index Change Advice (ICA) notice, noting the
Naspers announcement. Following the publication of the Naspers circular on 29 May 2019, FTSE/JSE published an
Informative Notice on 13 June 2019 setting out the proposed index treatment of the event. Following the
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extension of the indicative dates associated with the transaction further ICA notices were published on 24 June
2019, 29 July 2019, 4 September 2019 and 16 September 2019.
3. Treatment in Capped Indices
From market open on 11 September, the effective date of the capitalisation issue, Prosus was added to all indices
that Naspers was a constituent of. Prosus entered the index with a synthetic opening price, determined through
a process of broker consensus and the company valuation made available. Furthermore, due to the 1:1 terms of
the event, Prosus mirrored the shares in issue and free float of Naspers in the Index Series. In the capped indices,
Prosus had the same capping factor as Naspers. Therefore, Prosus was added to the indices with the same index
metrics as Naspers, e.g. free float, ICB and capping factor. The value of Prosus was removed from Naspers through
an index opening price reduction, equal to the synthetic opening price for Prosus. The standard FTSE/JSE spin-off
treatment is designed to replicate what happens to the index tracker, ideally resulting in no additional trading
required.
On 16 September a further notice was published confirming the update to Prosus shares in issue and investability
weight to incorporate the shares held by Naspers, its foreign company status, and the decrease in index shares in
accordance with the election results. A concurrent shares in issue update was applied to Naspers (to counter the
decrease in Prosus per election results). These changes were effective on 23 September, and incorporated into
the September quarterly index review changes in order to reduce unnecessary index turnover, and to align the
changes with an existing liquidity event. From market open on 23 September, Naspers obtained a new capping
factor in the capped indices, but Prosus was now uncapped, due to the company’s weight being below 10%.
The two tables below set out the changes in the All Share index variants at market close on 11 September, the day
Prosus entered the Index Series, and 23 September, the September review effective date.
Market Close on 11 September:
Index Weight
Instrument Shares Price Gross Free ALSI Capped SWIX ALSI Capped SWIX
MCAP (Rb) Float (J203) ALSI (J303) (J403) ALSI (J433)
Naspers 438,656,059 2,465 1,081.29 97% 14.44% 7.48% 18.03% 7.51%
Prosus 438,656,059 1,203 527.55 97% 7.04% 3.65% 8.80% 3.66%
Total 21.48 11.13 26.83 11.17
Market Close on 23 September:
Index Weight
Instrument Shares Price Gross Free ALSI (J203) Capped SWIX ALSI Capped SWIX
MCAP (Rb) Float ALSI (J303) (J403) ALSI (J433)
Naspers 444,667,763 2,385 1,060.55 97% 14.69% 9.78% 18.75% 9.74%
Prosus 1,624,652,070 1,138 1,848.90 10% 2.62% 2.77% 3.34% 3.71%
Total 17.31 12.55 22.09 13.45
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An investment concern in the indices would be a single large exposure to an entity. After the completion of the
transaction, investors ultimately have a large exposure to TenCent and the other internet assets, through separate
holdings in both Naspers and Prosus. In the capped indices, Naspers is down-weighted to 10% at each quarterly
review, by applying a cap. However, with both Naspers and Prosus included in the indices the current weighting
of the two entities combined is 11.14% in the Capped All Share (J303) and 12.02% in the Capped SWIX All Share
(J433), since they are treated as two separate companies (data as at 31 October). Many market participants would
have seen the Capped SWIX All Share Index launch as a means to reduce the weight of Naspers in the main market
benchmark index to 10%, and would reasonably question having an increased weight, above the capping level.
4. Further Considerations
As at 31 March 2019, the 31.1% interest of Naspers in TenCent was worth approximately US$136.2 billion
(Rb2,027) and Naspers had a reliance on TenCent for 79% of its revenue. As a result of the relative size of the
Group’s investment in TenCent, the market value of TenCent shares will continue to have a material impact on
the Group and will have a material impact on the market price of the N Ordinary Shares.
Naspers holds a 74% majority stake in Prosus. Considering a 31 October Prosus market capitalisation of Rb1,707,
the theoretical market value of this holding is Rb1,264. This market value exceeds the current Naspers market
capitalisation of Rb954, reflecting the discount reflected in the holding structure. Importantly, it also indicates the
extent to which the valuation of Naspers is dominated by its holding in Prosus. This supports the view that a
holding in Naspers effectively provides a synthetic holding in Prosus, and that this should be taken into account
when restricting access to single instrument exposure. The general principle here considers a holding company
whose valuation is almost exclusively dominated by its holding in a listed subsidiary. A subsidiary that is majority
owned or controlled, but is not a dominant contributor to the valuation of the parent holding company would not
be a concern from a capping perspective.
The table below provides the resident and non-resident split for both Naspers and Prosus.
Alpha Instrument Shares in Issue SA Holding Foreign Holding Total Strate %
NPN Naspers 444,667,763 175,779,609 267,519,123 99.69%
PRX Prosus 1,624,652,070 152,338,817 6,167,100 9.76%
5. Index Principles
Market benchmarks and indices in general must be anchored in a consistent and transparent methodology.
Wherever possible, index methodology should remain stable over time, and it is seldom appropriate to regularly
tweak index rules in response to specific corporate actions or events. Methodology should be based on sound
principles that reflect the objectives of the benchmark within the regulatory context in which it is offered.
In this context, there may be a proposal that Naspers and Prosus are treated as a single entity for index capping
purposes, despite them being two separate listed entities. There are two specific questions that have to be
considered:
* What is the most appropriate way to define a rule that considers Naspers and Prosus as a single entity
for capping purposes? There needs to be an unambiguous rule that the market can clearly understand,
interpret and predict, both for current constituents and future cross-holdings. There are a number of
ways to look at this rule, for instance:
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o Market capitalisation of parent company relative to the market value of its holding in the subsidiary
o Proportion of revenue for the parent company that is directly derived from its holding in the
subsidiary
o Requirement for a controlling stake in the subsidiary
In each case, it is necessary to consider the practical implications of obtaining the required data for all
index constituents, the potential lag in using accounting data as well as complexities with accounting
and reporting standards. FTSE/JSE is not in favour of relying on annual company financial statements to
construct broad market benchmark indices due to concerns around lagged implementation, accounting
standards and consideration for ad hoc events.
* The necessity to future proof the definition of when two independent companies are treated as a single
entity for index purposes. For example, consider a rule worded as follows:
Where an index constituent has a controlling stake in another index constituent, and the market value
of that stake is greater than 75% of the prevailing market capitalisation of the subsidiary company, then
the two companies shall be considered two classes of share of the same company for all index capping
purposes.
The parent company may diversify its earnings base away from the subsidiary with the result that the
subsidiary valuation falls to 74% of the holding company market capitalisation. In this event, the index
methodology would then immediately consider the two instruments to be separate companies again.
A market price movement may cause the ration to exceed 75% at the subsequent quarter, resulting in
a reversal of the treatment.
FTSE/JSE is not aware of any global precedent in terms of capping methodology whereby two separate listed
instruments are capped as a single entity. Any implementation of such a rule in the South African context would
thus lead to a divergence from global practice.
6. Proposal
Treating Naspers and Prosus as one entity for capping purposes only in the FTSE/JSE capped indices, would
alleviate the single large exposure risk to TenCent. The principle would be to construct a Ground Rule that will
resolve any future large single stock exposures by looking at how much the valuation of the subsidiary company
holding contributes to the parent company’s gross market capitalisation
To meet the requirements for capping two entities together, on review cut date:
* Both the parent company and subsidiary company have to be JSE listed
* The parent company shareholding in the subsidiary company is restricted for free float purposes (cross-
holding)
* Consider the gross market cap of the holding company and the percentage of the subsidiary gross market
cap held by the parent company
* If this holding is 75% or higher, the two companies will be consider as a single entity for capping purposes
in all capped indices where they are both constituents
* If this holding falls to 65% or below at a subsequent quarterly review, the two entities will no longer be
capped as one entity
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Example:
* Gross market cap of holding company – Rb954
* Gross market cap of subsidiary company – Rb1,707
* Restricted holding of parent company in subsidiary – 74% (Rb1,264)
The two tables below illustrate the current weight of Naspers and Prosus in the Capped SWIX All Share and Capped
SWIX Top 40 indices, as well as the index weights after implementing the proposal of capping Naspers and Prosus
as one entity. It is important to note that capping takes place on a quarterly basis and during the course of the
quarter the combined weights can move above or below the 10% capping level, due to price movements.
Alpha Instrument Index Current Index Weight Proposed Index Weight
NPN Naspers Capped SWIX All Share (J433) 8.64% 8.45%
PRX Prosus Capped SWIX All Share (J433) 3.38% 1.55%
Total Weight 12.02% 10.00%
Alpha Instrument Index Current Index Weight Proposed Index Weight
NPN Naspers Capped SWIX Top 40 (J430) 8.63% 8.45%
PRX Prosus Capped SWIX Top 40 (J430) 4.49% 1.55%
Total Weight 13.12% 10.00%
The proposed treatment would impact the following FTSE/JSE Capped indices where the combined Naspers and
Prosus weightings are currently in excess of the capping level:
Code Index
J300 Capped Top 40
J303 Capped All Share
J311 Capped Indi
J430 Capped SWIX Top 40
J433 Capped SWIX All Share
Note that this proposal would have no impact on any of the uncapped indices in the FTSE/JSE Africa Index Series,
and in particular would not impact the way that companies are selected for index inclusion purposes. The core
objective of this proposal is to improve the quality of the capped indices in the series as a benchmark for local
equity funds.
7. Responding to the Consultation
It is important to FTSE/JSE to be aware of the impact to clients as well as any unintended consequences of the
weighting concentration of Naspers and Prosus in the FTSE/JSE Index Series. FTSE/JSE is committed to providing
market benchmarks that are credible and consistent, and the purpose of this market consultation is to obtain
feedback from index users regarding their concerns around the proposed solution.
The feedback received from this consultation will be presented to the FTSE/JSE Advisory Committee at the
December 2019 meeting after which the proposal will be presented to the FTSE Russell Governance structures.
Further announcements will be made is due course. This change will not be applied at the December 2019
quarterly index review.
Please provide us with your comments and suggestions by Friday, 22 November 2019 to the following email
address: indices@jse.co.za
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When determining the timeline for the implementation of any decision, FTSE/JSE is mindful of the broad usage of
these indices in the market and the need to provide appropriate notice. This document is not confidential and
should be distributed as widely as possible to all stakeholders.
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Date: 05/11/2019 10:09:00
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