Solvency is a bedrock principle in corporate finance, typically gauged through meticulous assessment of a company's assets, liabilities and cash flow. Yet, a tender dispute involving Transnet has spotlighted a highly unconventional approach: using market capitalisation to prove solvency.
Let’s be clear: market capitalisation — the total market value of a company's outstanding shares — reflects investor sentiment and market conditions, both of which are notoriously volatile. Solvency, on the other hand, is about stability and long-term financial health. The two are not interchangeable. They are fundamentally different and should not be conflated.
Transnet’s decision to accept International Container Terminal Services Inc’s (ICTSI’s) use of market capitalisation to meet the solvency ratio requirement isn’t just unorthodox, it is virtually unheard of in standard financial practice. Worse still, Transnet has essentially built its financial house on shifting sands of investor sentiment rather than the solid bedrock of financial stability — a precarious foundation.
This raises critical questions about the integrity of Transnet’s tender process. If market capitalisation is accepted as a valid measure of solvency, it sets a dangerous precedent that could undermine the credibility of future tenders.
But the pressing question is why Transnet bent over backwards to accommodate ICTSI. Court documents, obtained by Business Day’s companies and markets editor Kabelo Khumalo, show that Transnet ignored its own internal advice and expert opinions, which deemed the use of market capitalisation inappropriate for solvency calculations.
What motivated Transnet’s decision? Why did Transnet choose to overlook its own internal audit and external expert advice? Was there undue influence or pressure by certain quarters to favour ICTSI? How can anybody trust the fairness of Transnet’s tender processes if established financial principles are disregarded?
These aren’t trivial questions. They go to the heart of transparency and accountability within Transnet’s decision-making process: did legitimate business considerations or undue influence to favour ICTSI — a R140bn-plus operator straddling six continents — drive this decision?
This decision has not gone unchallenged. APM Terminal, a unit of Maersk, has taken the matter to court, arguing that ICTSI’s bid should have been disqualified for not meeting the solvency criteria based on annual financial statements. The legal battle has drawn in accounting experts from Wits University, each side presenting arguments on the appropriateness of using market capitalisation in solvency calculations.
ICTSI, conversely, defends its position by highlighting that market cap is a common practice in global markets, reflecting investor confidence and the company’s ability to raise capital. It argues that market capitalisation is a valid indicator of a company’s financial health and its capacity to secure funding.
Still, this defence does little to address the core issue: market capitalisation is inherently volatile. It can gyrate widely on market conditions, investor sentiment and external factors. Using it as a measure of solvency is a bit like building a house on quicksand. One bad day in the stock market, the entire financial foundation could crumble.
At the risk of stating the obvious, Transnet's Durban Pier 2 Terminal is a critical asset, and its management affects not just Transnet but the entire logistics and trade infrastructure. If the court sides with Transnet, it would open the floodgates for other companies to use similarly volatile metrics to meet financial requirements, potentially destabilising tender processes across various entities.
In a world where cash is king, Transnet seems to be saying, “Who needs cash when you have market cap?”
Whether this is a stroke of genius or a financial shortcut, only time — and the courts — will tell. What is not in doubt is that it is a strange move and one that has left financial experts scratching their heads.
• Motsoeneng is Business Day deputy editor
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