Marconi: the wrong end of the telescope?
9 September 2002
The tyranny of numbers, according to certain lawyers, is that they tend to cloud people's judgement.
The weekly payment of £500,000 to advisers acting on Marconi's debt restructuring may initially appear very high. As might the estimated £16m of total billings the three law firms - Allen & Overy (A&O), Bingham McCutchen and Clifford Chance - and accountant PricewaterhouseCoopers (PwC), will eventually share out once the deal is completed. After being cooped up in Clifford Chance's offices for weeks on end, as meetings ran into 24-hour and even 48-hour affairs, the firms will no doubt argue that the level of fees is justified.
And these figures will not even scratch the surface when Marconi finally tots up its advisory bill. As reported in The Lawyer last week, restructuring specialist Talbot Hughes is expected to receive a success fee of between £2m and £3m for its expertise.
Lazard and Morgan Stanley, which replaced UBS Warburg and Credit Suisse First Boston as Marconi's advisers last October, and Greenhill & Co, the US investment bank and representative to the bondholders, are also believed to be working for a success fee.
All of these monies will be paid out by Marconi from a £850m 'lock-box' of cash, which has been cordoned off from use by the company.
While there is no question that the final debt for equity swap was mind-numbingly complicated and saved the company from certain death, why did it take so long to come to such an expensive conclusion? Bearing in mind that Marconi issued its first profits warning in July last year and spent five months chasing its tail over an unsuccessful refinancing plan, time and money has been wasted in spades.
At one point, A&O's team swelled to 100 lawyers and included big-hitters such as Marconi relationship partner and global head of banking David Morley. And at Clifford Chance, swathes of lawyers, led by Mark Campbell and Nick Frome, saw months of negotiations come to nothing while racking up major fees.
"This whole situation has been appallingly handled," said one lawyer close to the deal. "[Marconi] has been very arrogant in sorting out what has been a needlessly long process."
Formerly worth £35bn when its share price touched a high of £12.50, Marconi was once positively imbued with arrogance. Such was its standing in the City, the single-minded Marconi was able to borrow £4.5bn at the end of 1998 and then e3bn (£1.9bn) in May last year. Two months later, the first wave of profit warnings hit.
The process of attempting to sort out Marconi's monumental debt problems - dubbed 'Project Telescope' - began in earnest in October.
The coordination committee of syndicate banks, led by Barclays, HSBC and JPMorgan Chase, and advised by Clifford Chance and PwC, consisted of 27 banks owed around £2.3bn by Marconi. The thought was that the banks would extend Marconi's two bank facilities, which were due to expire in early 2003, but would insist on introducing covenants to the loan agreements.
Hovering in the background were a number of increasingly worried bondholders, that were owed £1.7bn by Marconi, represented by Bingham McCutchen.
With an investment grade company the banks and the bondholders rank pari passu. One source told The Lawyer: "The banks were saying that they would extend the facilities if they were given seniority." If this was the case and Marconi became insolvent, the banks would be first in line to recover any assets, leaving the bondholders with little more clout than the shareholders.
Instead of reassuring the bondholders, Marconi chose to ignore them. "We had approached the management in October," says one source, "but were told that they were not going to talk us. They were so arrogant and were still behaving like they were a FTSE 100 company."
Although the bondholders did secure a meeting towards the end of last year, their fears that Marconi would default on the bonds went unheeded.
From January to March, Clifford Chance and A&O attempted to guide their clients towards a solution, as Bingham McCutchen pleaded on behalf of the bondholders for another audience with the management.
On 22 March, faced with the deteriorating telecoms market and a series of downgrades from Standard & Poor, Marconi finally faced reality - restructuring. The company's e3bn (£1.9bn) facility was cancelled, as was the rest of the £4.5bn loan that Marconi had not yet dug into.
One source says: "It became clear that, by 22 March, the market decline was steeper than expected and refinancing was no longer viable. But it was the speed of the company's decline that surprised people. Just 18 months ago, the company was an investment grade business and now it's rated at junk bond status."
The bondholders were finally brought into the loop and Greenhill & Co was appointed. Allen Thomas, a former partner with Paul Weiss Rifkind Wharton & Garrison and an expert in restructuring, was appointed as a non-executive director. Marconi also employed Talbot Hughes to direct the process.
John Talbot, co-founder of the group, told The Lawyer: "It was complicated because there were so many issues. It's a large company and there was also the large number of creditors."
A source said: "While NTL was the biggest restructuring, as its debts reached $17bn (£10.9bn), Marconi was infinitely more complex."
And it is not over yet. Non-binding indicative heads of terms have been agreed, where by Marconi will hand over £900m to its creditors, keep £500m as working capital and will issue new debt of up to £500m.
Marconi plc will be delisted from the London Stock Exchange and Marconi Corporation plc, where the previous debt was held, will become the holding company; that way shareholders were kept out of the vote and have ended up with just a 0.5 per cent stake in the group.
A scheme of arrangement must now be drawn up before it is presented to the Companies Court for approval. Even at this stage, there is talk that some of the banks are unhappy with the deal, so plans to reach the Companies Court by the November deadline may come unstuck.
But what about the wasted time and the wasted fees? Should Marconi not have faced its problems head on earlier when, for example, deputy chief executive John Mayo was still at the group?
Maybe not. As one lawyer said: "I think someone would have brought a loaded gun into the room and shot him, quite frankly."