Fund managers are steering clear of the stock, believing it has little chance of recovery
With its share price at around 6p-7p and the total company valuation down to $194m from a $48.7bn high in 2000, Marconi is engulfed in debt and bearing the burden of low interest rates.
Many fund managers do not even view the stock as a turnaround opportunity and are steering clear of it entirely.
Peter Cockburn, UK investment manager at Edinburgh Fund Managers, said: 'Marconi is a huge company but with its debt and plunging share price, it might go into liquidation. We do not think the company has any value so do not hold any of its shares. It is very reliant on banks and has been renegotiating with them, which is a major concern.'
In order to keep its head above water, the multinational is looking to swap bonds for equity in order to alleviate its crippling interest payments. The level of this debt burden is indicated by its payment last month of E28.2m euros for its 5.625% bond, which matures in 2005. It still has to make another payment of E63.8m this year for its 6.375% bond, maturing in 2010.
Stephen Martin, director of global equities at RSA Investments, said Marconi took a wrong footing by trying to turn itself into a new technology company.
'Originally, the company was called General Electrics and catered for a wide range of electrical goods,' he said. 'It then became more and more focused and the new board ultimately decided to sell off its defence section to British Aerospace and concentrate on the tech market.
'Marconi made several acquisitions and paid in cash for these rather than in shares, draining the company's liquidity. When there was a slowdown, its internal system did not alert top management quickly enough and the company failed to react fast enough, experiencing a sudden and deep downturn. One of the reasons for the sharp slump was that BT, one of its main customers, was suffering from slack demand and had cut its capital expenditure budget.'
The company's 5.625% bonds, due to mature in 2005, are trading at 35% of face value, an indication that bondholders do not expect to be repaid in full. Instead, the company is expected to start talks about a swap within weeks.
'Marconi would probably like to do the swap quickly but it all comes down to how much it has to settle for the debt,' said Cockburn.
A swap normally has two major effects. Firstly equity holders' share of the business is diluted, reducing share value and diminishing voting power. This also means any dividends the company is able to distribute in the future must be shared among a larger pool of stakeholders.
Secondly, in case of liquidation, bondholders who swap paper for shares will no longer be first in line to get paid.
'The swap would cause dilution for shareholders but the alternative is liquidation,' said Martin. 'Bondholders rank higher than equity holders in liquidation. In Marconi's case, shareholders have already lost most of their rights since, if the company goes to liquidation, shareholders will get very little back but bondholders retain some rights.
'They have to make a decision based on whether they will get more out of liquidation or a swap. There are no hopes for buyers at this stage.
'Any buyer would let the company go bust first then buy it off the creditors. Management probably plans to make the swap and wait for a year or so, then sell the company to get value.'
Marconi is an international company that specialises in the information technology and global communications marketplace. The group develops and supplies data networking equipment and solutions to telecommunications operators and ISPs. Marconi's other operations include electronic and information system solutions and capital businesses that provide funding for various investments.
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