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Mergers & acquisitions

Marconi Closes In on Zero Debt

Marconi Corp. plc (Nasdaq: MRCIY; London: MONI) has sold off the last of its non-core activities, its Outside Plant & Power business, for $375 million in cash (see Marconi Sells Power Business).

The North American business, which provides equipment such as street cabinets, equipment racks, and power units to operators, counted a number of Tier 1 U.S. carriers among its customers, with Sprint Corp. (NYSE: FON) being one of its largest, according to a Marconi spokesman. The new owner is Emerson Electric Co., which will also take on pension and retirement liabilities worth a further $31 million.

Marconi will use the cash proceeds to cut yet more of its debt. The sale of its North American access equipment unit to Advanced Fibre Communications Inc. (AFC) (Nasdaq: AFCI) earlier this year helped to close off its short-term debt (see ... And Helps Marconi Cut Its Debt). Following the Emerson deal, Marconi will have just $104 million, or about £56 million, of its long-term debt left to pay down. When it came out of restructuring in May 2003, Marconi had £788 million of short- and long-term debt (see What's Next for Marconi?).

The sale announcement gave Marconi's share price a boost on the London Stock Exchange as it jumped 12.5 pence, nearly 2 percent, to 687 pence.

As with the sale of its access equipment business, Marconi has sold a business unit that was improving. The unit had sales of about £209 million ($387 million) in the year ended March 31, 2004, and an operating profit of £14 million ($26 million). Marconi spokesman David Beck says the unit was "on an upwards curve," and that allowed the company to get the sort of price it was looking for, at more than one times sales.

"The logic for having this business was greater when we were selling Sonet gear, but we haven't been in that market for about three years now. We didn't have to sell, and were only going to do so if we got a good price, which we have."

And Beck rejects the notion that the sale will cut off a pipeline into the big North American carriers, there being no history of telecom equipment sales linked to contracts won by the plant and power unit. "The procurement process is done in a completely different way," he notes, insisting that the sale of the unit will have no impact on Marconi's remaining lines of business.

Beck adds that there are no plans to sell any further parts of Marconi, and that the vendor is now in "a net cash positive position" that will be improved by the further reduction of its debt. Now it aims to become debt free by paying off the remaining chunk of its senior notes using its cash reserves, which are likely to be in the region of £300 million ($556 million) when Marconi provides a trading update next Thursday (July 15).

This all spells good news for the current management team, who are due some ripe bonuses as a result of the debt reductions and current capitalization (see Marconi Execs Collect on Turnaround). In addition, Marconi is securing lucrative new deals and even launching new products (see BT Renews $656M Marconi Deal, Marconi Scales Down Its Edge, Marconi Lands Telstra Deal, Marconi Softswitches With BT, Marconi Lands $33M Contract, and Belgacom Upgrades With Marconi).

But it's unlikely to do much for the humor of the former shareholders, many of whom lost their shirts when they were handed just 0.5 percent of the new equity when Marconi returned to the financial markets last year.

— Ray Le Maistre, International Editor, Boardwatch

cyber_techy 12/5/2012 | 1:28:18 AM
re: Marconi Closes In on Zero Debt


"The logic for having this business was greater when we were selling Sonet gear, but we haven't been in that market for about three years now. We didn't have to sell, and were only going to do so if we got a good price, which we have."




The reality is that Marconi could not compete with Calix because of their beverage holder feature.
OneMoreByte 12/5/2012 | 1:28:16 AM
re: Marconi Closes In on Zero Debt Is the division Marconi is selling the former RELTEC, which was purchased in 1999 for $2.1B?
konafella 12/5/2012 | 1:28:15 AM
re: Marconi Closes In on Zero Debt Reltec, when Marconi purchased them in 1999 for $2.1B, had essentially three lines of business - North American access networks, SONET optical networks (which Reltec acquired in 1998 for $200M from Positron), and outside plant and power (OSPP - which was acquired from Lorain Power years before).

North American Access was recently sold by Marconi to AFC for $240M. RELTEC/Positron SONET was effectively shut-down my Marconi in 2001.
OSPP is being sold now to Emerson for $375M.

Make sense?
hyperunner 12/5/2012 | 1:28:13 AM
re: Marconi Closes In on Zero Debt I have to say that, as an engineer, this deal doesn't make a lot of sense for me.

The OPP group is in good financial shape, and actually continued to bring in a beat rate of business over the financial drought of the past few years. OPP business is highly granular, which means you can still swing POs when there's a financial clamp down. And the contracts tend to be very long term, and they get renewed usually. Bottom line - this is boring stuff, but it's good, reliable revenue.

What's this nonsense about "we don't make SONET anymore, so OPP isn't as relevant"? How much SONET gear did Marconi EVER sell? We never bought Marconi SONET gear in our US operation, but we do buy from OPP.

Let's face it. The senior execs get a big fat bonus if there's zero debt. To get zero debt you have to sell something. To sell anything there has to be a buyer, so you can't just sell junk. And OPP is one of the only assets left on the shelf that satisfies those criteria - regardless of the fact that it's doing good business.

Oh well.

hR.
cyber_techy 12/5/2012 | 1:28:12 AM
re: Marconi Closes In on Zero Debt


Now that the Access business and OPPS business have been sold, the only remaining business in NA is the BBRS business run out of Pittsburgh. This business is the old FORE business. The BBRS business is mostly comprised of business sold the Federal govt. They have very good ATM switches and a excellent rapport with government customers.




You're definitely not an insider.
Fedguy 12/5/2012 | 1:28:12 AM
re: Marconi Closes In on Zero Debt Now that the Access business and OPPS business have been sold, the only remaining business in NA is the BBRS business run out of Pittsburgh. This business is the old FORE business. The BBRS business is mostly comprised of business sold the Federal govt. They have very good ATM switches and a excellent rapport with government customers.
paolo.franzoi 12/5/2012 | 1:28:11 AM
re: Marconi Closes In on Zero Debt
Marconi was in a bit of a pickle. You are correct that this was a nice boring business. But it also was off the strategic center of the company. In many ways, it was its own business. It provided no leverage for the retained portions of Marconi's business, which is much more a European business than before the dual divestitures.

Given that their restructuring drove them to eliminate debt, what would you have them sell? I think the bonuses are tied to what the owners want the company to do. Seems like a proper way to make management do what the boss wants.

seven


OneMoreByte 12/5/2012 | 1:28:04 AM
re: Marconi Closes In on Zero Debt cyber_techy wrote:
> You're definitely not an insider

I thought Fedguy's assessment of BBRS was pretty accurate. What do you dispute?
hyperunner 12/5/2012 | 1:28:02 AM
re: Marconi Closes In on Zero Debt Hi seven,
I wondered if anyone would bring up the "core business" argument. I'm not as sold on it as I used to be.

As a "Yank" here in Europe I saw the UK press articles that detailed Marconi's financial problems a couple of years back.

One of the big gripes the UK folks had with Marconi was that the company had shifted from being a diversified conglomerate, which was able to weather the storms of recession because it wasn't dependent on any one sector to be performing - to a pure telecoms company.

The idea was that telecoms was brining in bigger and better returns than the mish mash of companies in the GEC empire - at the time (ie. just before the crash).

It's the same argument between a mutual fund and owning an individual stock.

I bet if you look at how OPP has performed over the past couple of years, its revenues may have dipped, but held up a heck of a lot better than the other parts of the company.

To your second point - what would I have them sell. Why do they need to sell anything? Most companies run with a certain level of long term debt. I'm told by people who are supposed to understand this that it's a good thing to leverage the borrowing power of the company. And by the way - Marconi is now generating free cash each quarter. Let them pay off the debt that way.

My concern remains the same. The board has a personal financial incentive to eliminate the debt entirely. Let's hope they're able to balance this incentive against what's generally good for the company.

hR.
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