Is Marconi Cooked?

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
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lilgatsby 12/4/2012 | 10:14:17 PM
re: Is Marconi Cooked? Why would Marconi's banks agree that owning this sinking ship is better than the liquidation of assets? How are qtr after qtr of negative revenues better than pennies on the pound for all the ASX-xxx they can fire-sale? Sounds to me that a government entity is going to need to step in to save one of their largest companies because financially this is a laugh.

This company is enormous and the #1 SDH provider in Europe, yet has next to nothing for US business. Its transport hardware is questionable & unproven with most customers being vendor financed. Its FTTH seems to have traction, but opportunities are limited. It does seem to have consistent press regarding wireless deployments, but I do not know how this equates in margin and furthermore if this is yet another series of vendor financed projects to gain investor confidence...

Does anyone have any good points to make? Better hold onto those SmartPhotonix chassis,...could make a great collector's item or fish bowl within the next 6 months.
BlueWater66 12/4/2012 | 10:14:09 PM
re: Is Marconi Cooked? As an outsider who has dealt with them over the years, it seems like there is a HUGE gap between the groups in Italy and England. When you met with different groups in both countries, it never felt like a single company. Is this one of the original, key reasons for their downfall??? No unified structure, two cultures, giant old (almost government like) facilities in England. Obviously the telecom crash and pushed everything to an extreme head, but I'm interested in what left them vulnerable.
hyperunner 12/4/2012 | 10:14:08 PM
re: Is Marconi Cooked? We are a Marconi customer and were recently briefed by our account manager on the financial situation. Unless he is outright lying (not unknown, but I guess there are laws against it these days), lilgatsby has a few facts wrong.

"How are qtr after qtr of negative revenues better than pennies on the pound for all the ASX-xxx they can fire-sale?"

In fact Marconi is cash-positive. This was announced in their latest results. Sure it's massively overshadowed by write-offs and one-time charges from restructuring, but I bet Nortel, Lucent, and every startup you can name would love to be in this kind of financial shape.

"This company is enormous and the #1 SDH provider in Europe, yet has next to nothing for US business."

They have a pretty good DWDM portfolio, but that's irrelevant cuz nobody is buyin' anybody's DWDM right now. They have nothing in SONET - but we're sticking with incumbent suppliers there anyway, and buddies in other carriers tell me the same. We use their ATM switches (ie. Fore), and quite frankly they are excellent. I hear the US government like them too, so when you talk about a government bailing the company out, do you mean Uncle Sam?

"Its transport hardware is questionable & unproven with most customers being vendor financed."

Which "transport hardware"? Do you mean its SDH or DWDM, which are both mature and widely deployed? Do you mean its ATM products, which are rock solid and have been shipping for over 10 years? Exactly which Marconi transport hardware actually is "questionable and unproven"?

And where do you get your information on Marconi's vendor financing? This is a specific point covered in their sales team presentation - they have the lowest exposure to vendor financing of any company that size. Way lower than Cisco, Lucent and Nortel, even pro rata for revenue.

Even when you pay them a compliment you get it wrong! FYI Marconi has basically mothballed its FTTH operation.

One of our beancounters gave a presentation last week on the trend for both vendors and carriers to clean up their balance sheets with debt/equity swaps, and she mentioned Marconi specifically as a company that would come out of this mess in a very strong financial position, assuming the deal goes through.

The reason I feel strongly about people like lilgatsby making unfounded and negative statements is that a few weeks back I spent an hour with my boss justifying my decision to carry on buying their ATM gear.

SPARKLE 12/4/2012 | 10:14:06 PM
re: Is Marconi Cooked? As a vendor to Marconi Medical (now Philips), Marconi / Fore Systems, Marconi POS (NC) and Marconi CA, we obviously pay close attention to Marconi PLC's health. Hyperunner is correct, Marconi is cash-flow positive but lilgatsby is also correct in that they have had multiple, consecutive losing quarters.

As a client, hyperunner has little to worry about, if you are buying system hardware someone will maintain it down the road. lilgatsby's only missed point has been Marconi's spectacular headway into China, malysia and India, almost a post-colonial end-run, and by the way, why didn't they focus on these markets sooner? We do have fiscal concerns for Marconi right now but not enough to shut down their large blanket PO with us.

Selling their collection of opto IP to Bookham several months ago did garner them some working cash, I amsure enough for payroll and debt service through the summer.

zweisel 12/4/2012 | 10:14:04 PM
re: Is Marconi Cooked? lilgatsby wrote - "Why would Marconi's banks agree that owning this sinking ship is better than the liquidation of assets?"

Simple - the banks would think that the company would survive and be able to pay them back all of their loans instead of getting paid 5 cents on the dollar.
2bits 12/4/2012 | 10:14:02 PM
re: Is Marconi Cooked? LR, you keep talking about the debtors being in control of Marconi's future. Debtors are people who owe money, which is presumably Marconi in this case. I think you mean "debt holders".

hyperunner 12/4/2012 | 10:14:01 PM
re: Is Marconi Cooked? Hi SPARKLE,

Also included in the presentation was the fact that Marconi has $2.1B in the bank from its disposals, so if they owe you money I wouldn't be too worried unless the "new owners" get their hands on the cash. By new owners I mean the debt holders who will trade debt for shares in the company.

BTW I thought the disposal of the optical division seemed to be a mistake. Marconi got peanuts from Bookham ($20M maybe), and we were very impressed by a technology presentation we saw on the Caswell tuneable laser product.

Just for the record I'm not a complete Marconi fan, but lilgatsby's tirade against the company seemed to be unfair and downright wrong in places. Like one of the other guys on this thread I think they're a loose confederation of different companies that have no overlap or interaction. For example, ask them how a former Fore switch will link into their DWDM gear. Or rather, ask why I should buy a Marconi DWDM to go with my Marconi ATM, instead of Ciena or Nortel. No added-value features, different management systems. Basically different companies. I'm hoping if they downsize enough some of these people may actually start working together.

BobbyMax 12/4/2012 | 10:14:00 PM
re: Is Marconi Cooked? Marconi's trobles started to surface when its parent company acquired Forbes System. Forbes was a junky company with junky products,but it had published very impressive product description. Marconi is apparently not successful in selling its products in the US markets as there is not much demand for its poducts.

Forbes paid too much money for Forbes Systems. Essentially Marconi was cheated by Forbe's management who undeservedly filled up their pockets. Marconi has failed to bring any lawsuite against Forbes and the US government.

Very soon the company would be listed from Nasdaq. There is no present or future demand for Marconi's products and technologies
lilgatsby 12/4/2012 | 10:14:00 PM
re: Is Marconi Cooked? Thank you, hr, for correcting some of my misconceptions, and for the others who also added their $.02.

I am glad to hear they are supporting their FORE equipment, and I admit THAT was a cheap shot on my part. This has been their best product line and I have worked with this equipment for years and can also attest it is sound. Yes, Unc. Sam uses bocu ASX. But please don't give MONI much credit for the work done well before the boys in PA cashed out.

You may want to double check the number of consecutive qtrs they have been in the red (bring your calculator). NT & LU probably wouldn't love to be on the soon-to-be-delisted chart? Golly, but this must be a sign they are in great shape...
And please, do you really think your AM is going walk in and tell you they are in trouble? Keep in mind it's easy to say that things are looking up when you're at the bottom.

One word, Soliton. You can figure out the rest. I had heard that the FTTH line was pretty good, guess good doesn't equal profitable, huh.

Please don't compare this clown outfit to Cisco, Lucent & Nortel. And as far as vendor financing goes, I'm sure it has dropped off considerably in their current financial state.

That's the end of my unfounded statements, so cross your fingers and rub the lucky rabbit foot and maybe, just maybe, you'll have someone answer the Tech Support line the next time you call...

StartUpGuy1 12/4/2012 | 10:13:58 PM
re: Is Marconi Cooked? bobbymax,

Maybe you should check your posts for "spelling".. It was FORE Systems, not Forbes Systems.

But your point is well taken.. Marconi overpaid for Fore (but during that time, everyone overpaid) but their critical mistake was paying CASH for Fore and CASH for Reltek. They blew over 9 billion dollars in cash for those transactions. Nobody paid in cash 3 years ago but Marconi did not have any way to do a stock swap at that time. They should have gotten their stock on the NASDAQ and then made the deals.

Marconi never knew what they bought when they got FORE. Ignorance is no excuse...
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