Just one question remains for Marconi: Confidence of customers is the key issue now
By Robert Peston, CSQuest.com
Last Update: 7:05 AM ET Sep 4, 2001
LONDON (FTMW) -- There is just one last question to be asked about Marconi (MONI) (MONI) in the light of its latest calamitous announcement: Can it survive?
Following a precipitous collapse in demand for its telecom equipment products, it all comes down to the confidence of creditors, shareholders and customers. And it is this last group who will be most important over the next few weeks.
They appear to be postponing or canceling orders at an incredible rate. Thus the company said sales of core network products in the three months to 30 June were 25 per cent below the comparable period of last year. However, overall group sales at £1.13bn in this quarter compared with £2.1bn in the preceding three months - a drop of 46 percent. See story on Marconi issuing second warning
Now, my reason for saying this is incredible is that the drop is much greater than the capital expenditure cuts being announced by Marconi's customers, the big telecoms operators.
And there can only be two explanations for this discrepancy. Either the telcos are deciding in droves to switch from Marconi to other suppliers. Or the previous year's sales figures announced by Marconi were exaggerated (of course this latter explanation cannot be right, since the company would surely have disclosed any change in its revenue recognition policies).
Wildly optimistic
It is also important to notice that on July 4, a full month after the end of the relevant quarter, Marconi predicted that sales in the current year would be just 15 percent lower than 2000-2001 and that operating profit before exceptional items would be 50 per cent lower.
That looked pretty bad at the time. But it now looks wildly optimistic, compared with the latest prediction of an operating loss of £227m for the first half, an operating cash outflow of £553m for the first quarter and the company's complete inability to make any prediction for the full year out-turn.
So is there any bull case for the shares? Well, it is reducing operating costs yet again, with a further reduction of 2000 in the headcount. It also claims that there has been an increase in sales over the first quarter. And it hopes to reduce net debt to between £2.7bn and £3.2bn by March 2002.
Set against this is that net assets look as though they are going to emerge at pretty close to zero (this follows a belated decision to increase inventory provisions by £500m, raise provision for doubtful debts by £150m and write down the goodwill value of its businesses by up to £3.5bn - see my column of Aug 15, "Never too late to sell" . So bank creditors and bondholders, who collectively have loaned £4.4bn net to Marconi, will be feeling a bit jumpy.
Big risk
But the big risk for Marconi is that all the publicity it is receiving over its problems will alarm customers so much that they will take their business to other, more financially secure suppliers. It would then find itself trapped in a disastrous downward spiral.
I suspect a restoration of customer confidence will require more than today's management changes. With a rights issue looking impossible in the absence of any kind of certainty about the outlook for profits, I suspect a takeover is the only realistic option.
Does this mean the shares are cheap at these lowly levels? I fear not. Losses per share for the current year of around 10p are possible, according to Mustapha Omar, analyst at Collins Stewart. This would generate fair value for the shares of 6.4p, according to Quest's discounted cash flow model. In other words, shareholders should not expect any premium to the current price in the event of a takeover.
All in all, it is a dismal tale. The cost to investors and to the British economy of some grotesquely bad management has been painful. But the departing chairman Sir Roger Hurn today paid "a special tribute" to George Simpson, outgoing chief executive, for his "leadership and energy in reshaping Marconi as a leading network communications business". The 10,000 people who are losing their jobs at Marconi will doubtless be equally grateful.
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