Marconi issues second warning: Chief executive, chairman quit, shares ease
By Philip Stafford & Peter Bale, FTMarketWatch
Last Update: 11:36 AM ET Sep 4, 2001
LONDON (FTMW) - Marconi (MONI) (MONI) dumped its chief executive and chairman on Tuesday and issued its second profit warning in two months.
It announced a dramatic restructuring, cutting 25 percent of its workforce, selling non-core assets, suspending its dividend and cutting debt in what its new chief executive called a "decisive response" to the crisis which has hit the telecoms equipment maker.
Investors welcomed the news at first, sending Marconi stock as much as 6 percent higher in the first hour of trading to 57 pence. However, those gains faded during the day and the stock closed down 1.9 percent at 53 pence. A year ago the stock was at £12.76. See London markets report .
"A decisive response to the dramatic shift in the fortunes global telecoms" - new CEO.
In a surprise trading statement Marconi, which first issued a warning on July 4, said it lost £227 million in the first quarter and now expects a 2001 half year loss of the same level after a flat second quarter. It said sales in the second quarter fell 25 percent year on year and 46 percent from the previous quarter to £1.13 billion.
It had previously forecast a flat first half and earnings growth in the second half.
The company has been savaged by the slowdown in capital spending by telecoms operators and appeared to have been taken by surprise by the scale of the slowdown, triggering its warning in July.
Marconi said it will write off between £3 billion and £3.5 billion in the value of companies it had bought over the past two years in a rush of acquisitions. See story on July 4 profit warning
Goodbye George
Marconi said Chief Executive Lord George Simpson and chairman Sir Roger Hurn have resigned immediately, instead of leaving next year as previously planned.
Mike Parton, the current chief executive of its networks division, will take over as chief executive while Derek Bonham, chairman of Cadbury-Schweppes (CBRY) , will take over as interim chairman.
"With the operational review completed two weeks early, it was decided to accelerate the management changes," Parton said.
Justin Urquhart-Stewart of broker 7-Investment Management said Marconi was paying the price for misleading investors.
"I was fooled by them for the past two years. We all were. You spoke to the company and you believed it. The moral is: 'Don't mislead us because it will come back and get you at some stage.'"
The company announced a shake up to focus on its core business of optical technology for broadband telecommunications. Non-core businesses will be transferred to a new unit called Marconi Capital and managed for income.
Reduce that debt
It will also seek to almost halve its debt burden and cancelled its dividend payments. It was at pains to stress that most of the reduction will be through cost savings, rather than a significant increase in sales.
"We took a hard look at the balance sheet in the new market conditions," said Parton.
Marconi said its debt burden rose to £4.4 billion at the end of August. It aims to cut that to £2.7-3.2 billion by March 2002. In addition to the £780 million it expects to book from the sale of its Medical unit to Dutch electronics maker Philips (00953) in July, it aims to raise at least £500 million from the sale of non-core assets.
The company also increased provisions for its unsold inventory by £500 million and raise provision for doubtful debts by £150 million, as well as interest payments of £175 million.
It also has booked £450 million in restructuring charges.
"Our operational review is a decisive response to the dramatic shift in the fortunes of the global telecoms industry," Parton said in a statement. "We have reshaped our core business to concentrate on those activities where we are most competitively positioned. We are focused on matters within our immediate control with a particular attention to cost reduction and cash generation to reduce debt."
Marconi debt in the bond market has fallen dramatically. Its shares have fallen as low as 49 pence since the July 4 profit warning from a peak of £12.75 in August 2000 before the telecoms crisis erupted.
Rivals in the telecoms equipment sector have issued a steady stream of profit warnings over the past year as companies such as Tellabs Inc. (TLAB) were hit hard by the cutback in spending on telecommunications and fibre optic networks.
New CEO Parton and Marconi executives told a teleconference for reporters they didn't expect to have to go to shareholders with a rights issue at least this year - nor did they expect to have to refinance the company in the short to medium term.
Urquhart-Stewart said that was probably just as well: "It would be easier to raise the Titanic than raise a rights issue for Marconi, but maybe the level of the Atlantic will have fallen by next year."
Marconi said it also saw its future as an independent company, citing its strong relationships with existing customers as a big advantage. See Robert Peston on; Can Marconi survive? British Telecom (BTA) (BTY) is an important customer for Marconi.
No guidance on profits
Marconi said it couldn't give operating profit or sales guidance for the full year.
However, the company said it is seeing an increase in sales compared to the first quarter, and combined with cost reduction measures already implemented, Marconi says it sees a breakeven operating result and positive cash flow in the second quarter overall.
Parton said the company was building its business model around current market conditions and it did not anticipate an upturn.
"We can now see a lower level of sustainable revenue," he said.
Furthermore it was confident its second-quarter profits would break even and it would generate positive cashflow. It was also confident there would not be further goodwill write-offs.
'Glasnost' at Marconi
Analysts welcomed the new openness.
"It is quite an achievement that they are stating things clearly now, if only the fact that they gave quarterly sales in the context of a profit warning," Bernard Malhamé, an analyst SG Securities told FTMarketWatch.
"It still does not provide clarity for the future and the next calendar year, that is cloudy, but that is because of the lack of general visibility," he said.
'It would be dangerous to bet on a sustained recovery'
But he wasn't yet read to move into Marconi shares.
"It would be dangerous to bet on a sustained recovery," Malhamé said. "The shares are more or less fairly valued at this level for the news, we will have to wait for cost savings and breakeven levels to materialise, and that is a long way off."
Marconi said it will cut 2,000 more jobs on top of 8,000 already announced, with 600 going in the UK and 1,000 in the U.S. Its total workforce will fall by 25 percent to 29,000 by March 2002 the company said. Marconi said the cuts and other changes in the operational review will save £600 million a year.
"This review focuses on matters within our immediate control, with particular attention to cost reduction and cash generation to reduce debt," new chairman Bonham said in a statement.
Marconi chief operating officer Mike Donovan told an analysts conference call the company had started a review of facilities and property assets to reduce debt.
As part of the reduction in costs, he said Marconi would reduce capital expenditure to £360 million in 2001 against £561million in 2000.
Quarterly results
In a major concession to shareholders who have complained Marconi has kept them in the dark, the company said it also plans to move to quarterly trading statements on its performance. See Peter Bale on 'At last Marconi starts to listen'
"We are trying to be very transparent about the business model and what cash the model will generate in the future," Parton said.
Hurn put a brave face on the early departures and paid tribute to Simpson's contribution. There was no immediate comment from Simpson, who had masterminded Marconi's transformation from a defence and technology conglomerate into a narrowly-focused telecoms equipment group.
Simpson's former deputy John Mayo had already quit at the height of the crisis over the profit warning that saw Marconi shares suspended for the whole day of trade on July 4.
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