MOUNTING DEBTS MAY FORCE MARCONI TO SEEK BAILOUT

Cash-strapped vendor could tighten its belt even further

Marconi, the company that once had a $49 billion market cap two years ago, has now sunken to just above $306 million and is in such dire straits that it may need the British government to bail it out. With its stock hovering at a mere 22¢ and a new CEO, Mike Parton, at the helm, some industry watchers speculated that the company would not make its interest payments, due on March 30.

But representatives at Marconi discounted the rumor. “The company has no plans to default on its payments,” said a Marconi spokesman. In fact, the monies were transferred on March 28 to be paid on April 2, the spokesman said. The payments allow Marconi to pull through its latest cash crunch to deal with other ones and to determine how it will survive without much potential for revenue growth.

For Marconi, business from customers such as BT, France Telecom and Deutsche Telekom hasn't been enough to lighten the choking debt load it took on to get into telecom. The company must make one payment per year of $79.9 million. In total, Marconi has two bank facilities, one for $1.48 billion and another for $2.61 billion. The former has never been used and is set to expire in May 2003, the spokesman said.

“Marconi has a viable business, but the problem is that the debt level is so high,” the spokesman said. Many blame the overbearing debt on Parton's predecessor, Lord George Simpson, who was the driving force in shifting the company's focus from its energy roots as General Electric Corp. to a telecom business with a series of acquisitions, including Rel-Tec. Now the vendor giant doesn't foresee near-term business opportunities supporting a recovery.

“The market has deteriorated further, and the market upturn appears to be further away,” said the spokesman.

As a result, Marconi likely will propose swapping debt for equity, causing severe dilution of existing shares. Also likely, according to some industry sources, is that Marconi's creditors will be forced to take less in equity than the cost of their debt.

“[Creditors] now have the option to cash out,” said David Gross, senior analyst at CIR.

That isn't likely at this point, though, according to Gross. Although some service providers have been dissolved, Gross said he would be surprised to see a vendor of Marconi's size follow suit — a sentiment echoed by CIR Vice President Mark Lutkowitz.

“When you get that large in this market, it's hard to just disappear,” Lutkowitz said, noting that the British government may even subsidize the company.

As Marconi struggles with its debt, it also must also find a way to trim its business and focus on productive areas. In January, the company announced plans to lay off 4000 employees. So far, the company has “disposed of” several business units in its struggle to survive (see figure). In early March, Marconi pulled the plug on its Deep Fiber passive optical networking (PON) equipment, even though it was being shipped for a trial with Verizon Communications. Marconi also is evaluating its Wireless IP Local Loop radio transmission equipment, as well as the Digital Multipoint System and Digital Radio System.

MARCONI DIGS DEEPER

Sept. 4, 2001: Mike Parton appointed CEO. Sir Roger Hurn and Lord George Simpson resign from board

Nov. 27, 2001: Company disposes of holdings in Siemens Telecommunications

Dec. 17, 2001: Sells optical components business to Bookham Technology

Dec. 20, 2001: Sells Marconi Commerce Systems for $320 million in cash

January 2002: Layoff of 4000 employees

Jan. 10, 2002: Sells Data Systems subsidiary for $400 million in cash

March 2002: Discontinues Deep Fiber PON product line

March 22, 2002: Marconi agrees to cancel the un-drawn commitments under its two loan facilities

The move to shut down the PON product shouldn't really reflect that market segment as much as the Marconi PON product, according to Jeff Gwynne, senior vice president of marketing at Quantum Bridge.

“They didn't have a PON product in the traditional sense; they had more of a faux PON,” Gwynne said, adding that the Marconi equipment was designed more for fiber-to-the-curb and fiber-to-the-home applications rather than business uses.

Marconi plans to keep its distributed multiservice platform for the metro area and the ATM-based Access Hub edge switch it acquired by purchasing Fore Systems. The ATM switching gear accounts for most of Marconi's revenue from the U.S. market, according to Maria Zeppetella, vice president at Probe Research.

In fact, Marconi could reach positive cash flow if it resolves its debt problems and whittles its product line to ATM and MPLS-based equipment, Gross said. Such a plan would starkly contrast Marconi's quest for a stake in a wide variety of market segments, which led to the company's current woes.

“They participate in a lot of markets, yet they aren't a leader in any,” Gross said.