Marconi Friday stunned the market by announcing that it has been forced to drop a planned refinancing deal with its banks at the last minute because of a further slump in demand for its telecoms equipment products.
The company, once a leading high-tech manufacturer, now faces a wholesale financial restructuring which will leave shareholders virtually penniless. Marconi shares halved on the news, leaving the business, once worth more than US$43 billion, valued at a paltry US$400 million.
Marconi Friday warned that market conditions have continued to deteriorate this year and uncertainty is likely to continue beyond March 2003. It added that it will make a loss for the first three months of this year, disappointing analysts who had hoped to see the first signs of recovery.
As a result of this continued slump in demand it said it had been forced to drop plans for a new overdraft facility, opting instead for a complete change in its financial structure.
Marconi has been in talks with the banks that control its credit facilities since warning on profits for the first time last July.
Since then it has warned a further three times, cut more than 13,000 jobs, sold off virtually all its non-core businesses, written off billions of pounds from the value of companies it bought in the US during the dot.com boom and gone through a wholesale management reshuffle.
One of the company's advisers said last night that "a rights issue now would be madness," so it intends instead to swap its US$3.1 billion bank debt and US$2.6 billion of corporate bonds for equity in the company, giving its banks virtual control and leaving shareholders seriously out of pocket.
David Nugent, an analyst at Altium Capital, summed up the news as "game over" for shareholders.
A debt for equity swap is likely to lead to a bid for Marconi, whose core telecoms equipment business could be worth over US$1.5 billion if freed from its massive debts. Investment banking sources said last night that several firms are already considering making a play for Marconi if it manages to drag itself out of its financial hole.
Marconi remained in talks with its bankers last night, trying to thrash out its new capital structure. As a first step its banking consortium has cut off a US$2.7 billion credit facility which was set up last May and has never been touched. The banks have also stopped it using the remaining US$855 million it could borrow under its current overdraft facility and placed the US$3.1 billion it has already borrowed "on demand."
One of Marconi's advisers said: "The banks wanted some degree of security and protection -- it would obviously not be in their interests to call on them to repay that US$3.1 billion as it would push them over the edge."
But the adviser stressed that with about US$1.7 billion of cash after its six-month disposal programme, Marconi has sufficient funds to meet its day to day running costs for another year.
Union leaders last night called on the government to step in and broker a deal. Amicus general Secretary Roger Lyons said: "We have grave concerns for the future of the company."