After the Bell: The David and Goliath battle over a Transnet terminal

There is an old rule of journalism — and life, in fact — that you should try not to  opine on topics about which you know very little. So, with that said, this column is going to be about shipping, which I know very little about; terminals, which I know even less about; and two companies I know only vaguely. But, you know, I just can’t resist — it’s too interesting, too important and too complex to let fripperies like actual knowledge interfere with at least setting out the arguments. But please do take this all with a pinch of salt, and by all means, let me know if I have missed the point.

The issue is whether the KwaZulu-Natal High Court in Durban should intervene in the R12-billion contract agreed by Transnet with Philippines-based International Container Terminal Services, Inc (ICTSI) to run Durban’s Terminal Two container port for 25 years. This is a flagship public-private partnership project and if this one goes awry, then a whole host of other projects are likely to be put on the back burner.

The urgent application to the KZN High Court has been brought by a losing bidder, the Danish company AP Møller-Mærsk, generally known as Maersk, which is a household name in global shipping and is more than a century old. By contrast, ICTSI is a comparative youngster — about 40 years old — but is showing all the vigour of youth, growing fast and furiously: it runs 32 terminals in 19 countries across six continents.

Maersk’s argument in court is simply that Transnet misdirected itself by not applying its criteria uniformly across the five bids. The issue behind that concerns some rather abstruse accounting matters that notionally assess a company’s financial solvency. The issue behind that is whether the Transnet bid committee should have placed more emphasis on Net Asset Value (NAV) than market capitalisation when making that assessment.

You don’t have to be a genius to know whose NAV is better than, say, the company awarded the bid. Technically, ICTSI has a negative NAV, while Maersk’s NAV is absolutely humongous. On the other hand, ICTSI’s market cap is fantastic for its size and Maersk’s market cap is shockingly low for its much larger size. You can see this in the comparison between their trading multiples: ICTSI is trading at 20 times its earnings, while Maersk is trading at a little more than half that.

It’s hard not to get the impression that this is a corporate David and Goliath battle, or at least something of that ilk.

Let’s backtrack a bit. If you are trying to assess solvency, what are the advantages and disadvantages of focusing on NAV rather than market capitalisation? NAV is simply the company’s total assets minus its liabilities. If the liabilities are higher than the assets, then technically, the company is in the dwang because if something goes wrong, the sale of its assets won’t cover its liabilities. Since assets are typically more fixed and permanent, a high NAV suggests stability of operations.
Score one point here for Maersk.

Deceptive

The problem with looking at NAV alone is that it can be very deceptive. Some businesses, by their nature, have low or high NAVs, and the difference between these types of companies can be ginormous. For example, real estate companies are, almost by definition, all about assets. Manufacturing companies also tend to have high NAVs, while tech companies tend to have very small NAVs compared to their market capitalisation. Meta’s (Facebook’s) NAV compared to its market capitalisation is just a joke.

But other kinds of companies typically have low NAVs and they include shipping companies and airline companies, mainly because their assets are often rented and not owned. In these cases, it’s preferable to look at market capitalisation, because at least then you are factoring in market sentiment. It’s also a real-time measure.

So score a point here for ICTSI.

It must be said there are other problems with market capitalisation, the obvious one being that the measure can be volatile and driven by speculation and liquidity. It also doesn’t take debt into account; ICTSI has a lump of debt, while Maersk is sitting on a lump of cash.

Score another point to Maersk.

But surely the most pertinent point is that these are very different companies. ICTSI is a specialist terminal operator; Maersk is a shipping, logistics and warehousing megalith. It’s obvious which business, looking at profitability, you want to be in. Maersk made a profit of $3.2-billion off a turnover of just under $50-billion, compared to ICTSI, which made a profit of $1.5-billion off a turnover of $2.5-billion. That is, in technical terms, cooking with gas.

Score a point, or several in fact, for ICTSI.

The most important point is that, as far as I can see, Transnet did not specify a set of precise solvency ratios that it would mechanically apply beyond generally requiring bidders to be solvent. It implicitly reserved the right to make its own judgment and based on my loose analysis of its financials, ICTSI is absolutely fine. At least its profitability is rising, unlike Maersk’s, which is declining.

In any event, I think Transnet should have the right to choose its partners; if it turns out to be a mistake, then it’s on them. These decisions should not be simplistic tick-box exercises. Companies have to make judgments by taking all the factors into consideration.

What would be tragic is if this contract got caught up in South Africa’s legal system morass, because then every other public-private partnership down the line would be put on hold.

All in all, I think the court should reject this application, and do so quickly. Just saying. DM