Leap in Marconi's cash burn may hit refinancing deal

Marconi's lenders may force the company to renegotiate the terms of its financial restructuring deal after a trading update revealed a disastrous bleeding of cash.

Analysts said they were alarmed at the net cash outflow of £197m reported yesterday for the second quarter of the financial year. Richard Windsor, an analyst at Nomura, said: "The top line is okay. It falls to bits on the cashflow, which is potentially disastrous. £200m is a lot in anybody's money."

For the three months to the end of September, core sales, at £482m, were down 40 per cent on the period last year or 6 per cent lower than the first quarter. Marconi said it was a period of "further market deterioration". Debt was £2.85bn at 30 September.

The company did not put a figure on the core second-quarter loss but said it was down 20 per cent on the first three months of the year, before goodwill and exceptional items.

The second-quarter figures benefited from a £290m one-off gain from the sale of Marconi's defence communications business in Italy. Without that exceptional item, debt would have gone back above £3bn.

Mike Parton, the chief executive, said: "We held our quarterly sales decline in the Core to 6 per cent in what continues to be an extremely challenging trading environment and aggressively managed our cost base to reflect these tough conditions."

Mr Windsor said the quarter-on-quarter decline was not as bad as Marconi's competition had suffered but, given the high fixed costs of the industry, falls in demand hit hard.

Other commentators said that even the sales figure was cause for concern. Per Lindberg, at Dresdner Kleinwort Wasserstein, said that, traditionally, the second quarter should be stronger than the first. "This business is not viable. It desperately needs a strategic partner or a merger. Can this company make a living? Be competitive and serve its customers? You cannot be confident of that at all," he said.

Mr Lindberg said banks may conclude from yesterday's trading update that the company is not viable as it stands and re-open negotiations. He said Marconi only had significant market share in its optical networking business.

Marconi set out a business plan at the end of August when it announced an outline agreement with its syndicate of 31 banks. However, final agreement has not been signed off with the banks and this is not expected until January. It is also continuing to negotiate with a committee of bondholders. The restructuring will see Marconi's lenders take over the company, with shareholders left with just 0.5 per cent of the equity.

A Marconi spokesman said: "We have to deliver against the business plan. We are absolutely on track in all areas – revenues, cost reduction, cash generation and charges for restructuring."

Marconi booked a £100m restructuring charge for the second quarter, mostly to cover 2,000 redundancies made during the period. The headcount is now just over 19,000 and it plans to take employees down to 15,000 by the end of next year.

The company warned it is still considering the need for further write-downs in the value of tangible and intangible assets. If all goes to plan, Marconi will be de-listed at the end of January, to be replaced with a new stock, Marconi Corporation.