The timebomb under telecoms

By DAILY MAIL REPORTER
Updated:

 

MARKETS hate uncertainty and so Marconi's shares have been hovering at around 300p, or 75% below their autumn peak. Optimists hope this is about right.

Even if earnings for the year just ended come in at 16p, that is not too far short of expectations of 18p. Value Marconi at 18 times those earnings and a share price of 290p appears justified. That sounds plausible.

But US telecoms are in trouble, confirming the fears of those who argued Marconi overpaid hugely for its £2.9bn US acquisition Fore Systems. There are fears for cash flow, the balance sheet and the ability to keep its acquisitions together.

Another shadow is stalking the telecoms sector. During its glory days last year, when many bosses lost touch with reality, they made heavy use of 'vendor financing' - paying their customers to take their goods away. Take Marconi's relationship with Scots wannabe Atlantic Telecom. In profit terms Atlantic has yet to trouble the scorers, and its shares have slumped to 30 1/2p, valuing it at £65m.

Marconi bought a 27.9% stake (later diluted to 19.9%) at between 400p and 440p a share at end-1999. It gave Atlantic a UK network valued at £122m, paid it £50m cash and agreed 'vendor finance' of £50m to £100m over three years. That remains unused, but all this adds up to £280m, four times Atlantic's present market value.

Marconi is less involved than others, but vendor finance looks a time bomb under the industry. At the peak of the 3G licence frenzy, some suppliers offered customers financing of up to £3 for every £1 of orders.

Dresdner Kleinwort Wasserstein has warned that funding for 3G alone is 'so overwhelming that the will be felt across the global banking system'. Telecom troubles are by no means over.

The name is Bond
THE Welsh are going in for bondage as never before. Glas Cymru, the community-backed company which is taking over Welsh Water, launched the mother of all bond issues to raise the £1.9bn price.

Glas, chaired by former Treasury Secretary Lord Burns, aims to cut capital costs by funding itself with debt - plus a thin safety net of 'reserves'. It will have no shareholders but 50 voting 'members' drawn from local bigwigs.

If the plan works, it opens the gates for more debt-funded bids in the water sector - by an inch or so. Pennon, Kelda and AWG are top candidates. Expect a very slow trickle rather than a flood. But as interest rates ease, they add to the attractions of replacing equity with debt.

It will be May before the Glas fundraising is complete. It aims to raise money at 7% or less. That would enable it to double its initial reserves to £350m by 2005. The starting £176m reserves come because it is getting Welsh Water's assets at 5% below their valuation by watchdog Ofwat.

Glas is setting out on a tide of goodwill and good intentions. Chief executive Nigel Annett promises it is a 'transparent company'. Supplying the water is contracted out to United Utilities, sending the bills to Thames Water. Customer rebates could come as early as 2004. Annett is paid £125,000 - modest by industry standards - with a performance bonus of 80% to 100%.

There was much talk at the bond launch of escaping from the pressure of shareholders. But Glas has simply replaced these with bondholders, apparently assuming these are easier to handle than uncouth masses of Sids. Perhaps. The bond world is not simple. Glas will issue Class A bonds, then Classes B, C, D and R. In all it will have at least ten types of debt, including senior, junior, fixed rate, floating, index linked, sterling, euro and dollars.

Whatever happened to the KISS principle (Keep It Simple, Stupid)? No wonder the bond boys easily outnumbered Glas bosses at the launch, and there was much talk of 'evergreen fixing' a 'corporate revolver' and the like. It may sound better in Welsh.

US insurer MBIA is guaranteeing repayment of half of the debt and will be 'the majority creditor' with huge power. How much the guarantee costs is 'not disclosed'. So much for transparency.

This leaves an uneasy feeling, but will be a quibble if all goes well. Glas should benefit as interest rates fall, and on skipping Hyder's £75m annual dividends.

One of the bond types said: 'Default is hard to envisage with a regulated water monopoly.' Memories are short: that did not stop Hyder nearly going under.

Most watched Money videos