With its share price sliding off the radar (see Nasdaq to Delist Marconi), telecom equipment maker Marconi PLC (Nasdaq/London: MONI) today announced "good progress" with its plan to recapitalize the company. Company spokespeople hint that a deal is imminent.

But analysts warn that a debt-for-equity exchange -- in which Marconi would literally sell itself to its debtholders -- is not a guaranteed outcome. Caught between factions with potentially conflicting viewpoints, Marconi is literally fighting for its life.

Let's start at the top: Marconi's fortunes cascaded downward last year, after a series of financial and strategic missteps, coupled with deteriorating market conditions, led to a share price collapse and the firing of top execs (see Heads Roll at Marconi and Marconi Stock Tanks).

The company's crisis has centered on what to do with a total of about US$4.3 billion in net debt, about 51 percent of which lies in short-term facilities with a syndicate of banks, 40 percent in bonds, and the remainder in bank borrowings outside the realm of the syndicate.

Marconi originally hoped to rework covenants with its bank syndicate (see Financing Rumors Mar Marconi ), but that plan was abandoned in May because industry conditions were considered too wobbly to support the required revenue commitments. Since then, the company's pursued its debt-for-equity scheme, which many view as Marconi's best hope.

If the company succeeds in engineering a recapitalization, Marconi's bank syndicate and bondholders would trade their debt interest in the company for newly issued equity, thereby becoming the majority owners. Sources estimate that the debtors would own at least 90 percent of the company after the deal.

In any event, analysts say the dilution to the existing Marconi shareholders would be devastating. On completion of the debt-to-equity swap, the value of Marconi's equity would likely fall to zero. But if the owners then chose to issue new shares, the picture could change. After all, Marconi would be debt-free with a presumably healthy balance sheet.

"It would mean a fresh start for Marconi," says analyst Marcus Nash of Morgan Stanley Dean Witter & Co. in London. "But that's providing [the debtors] can agree on a transaction."

Some sources say the banks are at odds with the bondholders in any debt situation. And in Marconi's case, due to the absence of covenants, the bank syndicate has the power to shut down the company if satisfactory terms for the recapitalization can't be reached.

Were that to happen, sources say Marconi's fate would likely rest in the hands of a potential buyer -- or buyers, if its assets were sold off separately.

Who would buy Marconi in full or in part? Analysts say that's a tough question, given that the most acquisitive companies in the telecom business don't have the ready cash to do a deal, and the ones who do are looking for smaller fry.

Cisco Systems Inc. (Nasdaq: CSCO), for instance, was rumored to be sniffing around Marconi in 2001. But Cisco's made it clear that it's not in the market for big acquisitions this year (see Cisco's Appetite for Startups Shifts).

Another rumored suitor, Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), reportedly was the rejected bidder when Marconi's parent company, GEC, purchased Fore Systems three years ago. But Tellabs just switched CEOs and has been focused on keeping its own head above water (see Notebaert Takes Out Nacchio and No Surprises From Tellabs).

Plainly, Marconi's debtors are faced with a choice: They must decide soon whether it's in their best interest to force the company into liquidation or agree to a recapitalization.

The wild card seems to be Marconi's ability to convince its debtors that their best bet is to end up owning the company, an outcome that analysts say could conceivably send a strong message across the industry -- if it works.

At press time, Marconi shares were trading at $.15, down .04 (21.05%).

— Mary Jander, Senior Editor, Light Reading
http://www.lightreading.com