Marconi: The Deal Is Done
Marconi plc (Nasdaq/London: MONI) has reached a long-awaited agreement with banks and bondholders on the key terms of a debt-for-equity swap (see Marconi Clinches Refinancing Deal).
The arrangement sets Marconi back on its feet. Perhaps more interestingly, it puts the firm in a position to start selling some of its key assets, most notably some of its U.S. units, including its troubled access business (see Marconi to 'Streamline' Access ). There might also be some bigger sales in the offing.
Let's start with the financials. The complex plan unveiled today will enable Marconi's chief bondholders and banks to exchange existing debt claims of about $6 billion for cash, equity, and new debt.
The deal will be accomplished by Marconi Corp., a new entity replacing Marconi plc and owned by the old company's creditors. The new Marconi will have new listings on the London stock exchange and Nasdaq.
A mere 0.5 percent of Marconi's equity will be owned by shareholders of the old company, although they're being given an opportunity to buy a further 5 percent at a later date.
Clearly, a mixed bag. "Good news for credit holders spells bad news for equity holders," writes analyst Richard Windsor of Nomura Holdings Inc. in a note today. "If the business is worth £1.6 bn ... the equity holders get... just £8.3m. This gives a value per share of 0.3p. SELL maintained."
On a conference call with financial analysts today, Marconi execs dealt with concerns over roughly $464 million (£300 million) the company will still have in net debt when the deal closes. Marconi says it plans to whittle down to about $100 million by selling some of its assets.
Which brings us to the assets. When the deal is finalized, which is planned for January 2003, the new Marconi will be organized to reflect what the bondholders and corporate management see as the firm's key strengths -- and its most saleable assets.
Core assets, the ones seen as crucial to the company's future, will be part of Marconi Corp.; assets earmarked for sale will be lodged under an entity called Marconi Capital. Here's how the product lines will fall:
Marconi Core, Europe
- Optical networking: Optical is Marconi's chief business and will continue to contribute about 40 percent of its revenue, execs say. It's also chiefly a European business, reflected in Marconi's hefty share of the European SDH market -- about 25 percent, the company says. Marconi also ships DWDM gear from this division, mostly in Europe -- with an 8 percent market share there, according to company execs.
- Broadband systems: Here's the fixed wireless gear -- including point-to-point and point-to-multipoint radio access equipment -- that Marconi's chiefly peddled in Europe.
- Network services: Installation, value-added services, and carrier-centric integration will be largely focused on Marconi's existing carrier contracts in Europe.
Marconi Core, U.S.
- Broadband routing and switching: The multiservice ASX 4000 core switch, the ASX 200 and ASX 1000 edge switches, and a range of ATM gear will continue to be based in the U.S. Also included is the BXR 48000 multiservice core switch, which Marconi says is strategic to the company's success in North America. NOTE: The BXR was developed with input from the U.S. Naval Research Labs, but rumor has it the switch's first big customer will be another U.S. government agency, which will be announced soon.
- Wireless software and services: The company's glommed together a bunch of wireless consulting and planning services into this small but strategic unit based in the U.S.
- Outside Plant and Power, copper digital loop carrier gear, Marconi Online, Mobile (Tetra and UMTS product lines), assorted North American access gear
Significantly, in regrouping its product lines, Marconi's preserved a distinction between its European-based business and its U.S., which is based in the former headquarters of Fore Systems, acquired by Marconi in April 1999 for $4.8 billion that later caused the company massive writeoffs and other woes (see Whatever Happened to X? and Marconi Loss Tops £5B).
Could Marconi be drawing these distinctions with a view to possibly selling its U.S. arm? One source familiar with the company, who asked not to be named, says yes. He reports that the U.S. business was put on the block months ago, then withdrawn after a high bid of a mere $100 million, allegedly made by Tellabs Inc. (Nasdaq: TLAB; Frankfurt: BTLA), convinced management a sale wasn't worth it.
With its new balance sheet, Marconi just might be ready to reconsider a U.S. sale, he says. "The U.S. team is very strong, they're war horses, and the products are the best I've ever seen," says the source. He claims the departure of Marconi's ill-starred management under Lord Simpson last fall (see Heads Roll at Marconi) apparently started U.K. management rethinking its approach to the stateside business. He thinks it could spell the end of ongoing problems with market execution that the source claims Marconi's had in the U.S. and possibly mark the start of delayed marketing to enterprise customers.
But times have changed along with Marconi's balance sheet. The alleged instigator of the Tellabs/Marconi buy, Richard Notebaert, has left Tellabs. And the market continues to languish, making it tough to justify a sale of assets. Indeed, on today's conference call, execs made it clear that no negotiations had begun for those Marconi Capital assets the company openly hopes to sell. Marconi may decide to delay any sales until the market improves, they maintained.
Meanwhile, Marconi's got its eye on the future, and an ambitious business plan that clearly calls for input from all of its core product lines -- although when pressed, execs today acknowledged they can't yet state exactly which businesses will contribute the most to future sales.
In planning its long-term future, Marconi's laid out two scenarios, one best case and the other, a "sensitized" scenario given the distinct possibility that carriers will continue to delay buying longer than 2003. Here are the projections:
Table 1: Marconi Financial Projections
|BUSINESS PLAN ESTIMATES*|
|Operating profit before interest and tax||$308.20||$481.65||$560.63||$675.24|
|EBITDA (pre exceptionals)||$506.51||$670.70||$754.35||$881.43|
|Operating cash flow (post exceptionals and tax)||$212.23||$478.67||$574.71||$672.32|
|Operating profit before interest and tax||$154.88||$371.73||$481.72||$590.14|
|EBITDA (pre exceptionals)||$322.18||$542.13||$655.24||$776.07|
|Operating cash flow (post exceptionals and tax)||-$9.29||$274.19||$456.98||$587.14|
|* in millions, converted from British pounds to US$. Source: Marconi|
At least one analyst on today's call voiced concern that the figures above, even the sensitized ones, are too ambitious. But Marconi execs claim it's based on realistic assessment of the company's position, although they acknowledge the market size is something they can't nail down. Today's news sent Marconi’s share price bouncing upwards by nearly 20 percent in London this morning, to reach a dizzying 2.03 pence (about 3 US cents) at 11:00 AM. This values the company at about £56 million ($86 million) -- a far cry from the $50 billion it was valued at two years ago.
— Mary Jander, Senior Editor, Light Reading