Marconi sells to Ericsson and consigns a century of industrial might to history

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The move will result in almost 1,500 job losses and a £4m windfall for its chief executive Mike Parton. Shareholders will receive £577m of the proceeds while a further £675m will be set aside to safeguard the pensions of 69,000 current and former Marconi employees.

But more than that, it signifies the death, after a long and lingering illness, of perhaps the most famous British industrial institution of the past half-century. The deal will consign the famous Marconi name to a bit part within the mighty Ericsson empire when once the company, previously GEC, was the biggest, wealthiest and most powerful industrial combine in the country.

Ericsson is buying virtually all of Marconi's manufacturing businesses, including those which make equipment to drive broadband internet networks. The rump of the company will be renamed Telent and will specialise in servicing Marconi's customers such as BT, Cable & Wireless and Network Rail.

Asked what Lord Weinstock, the former managing director of GEC, would have made of the Ericsson deal had he been alive, Mr Parton said: "I'm sure he'd have had a point of view but I'm not sure how relevant that would be to today's transaction."

GEC's empire once spanned everything from television sets and guided missiles to trains and gas turbines. Almost as legendary as the company's breadth was its £1bn cash pile which Lord Weinstock guarded with a jealousy bordering on the pathological.

But the seeds of Marconi's demise were sown in 1996 when Lord Weinstock relaxed his iron grip on the business he had so painstakingly built up and handed control to a new chief executive, George (later Lord) Simpson. Within two years, the Marconi defence electronics business had been sold to British Aerospace. A year later, the cash pile was frittered away on the ruinously expensive purchase of two US telecoms equipment companies. Three years after that, Marconi, now GEC, was a busted flush, its value crashing 95 per cent as the dot.com bubble burst.

Marconi was refinanced and resurrected in 2003 as a pure telecoms equipment business but was vulnerable, being only No 4 or 5 in the market.

The catalyst which led to the sale of Marconi to Ericsson was its failure in May to win any of the £10bn order to help build a new 21st-century network for BT. Mr Parton maintained Marconi would have lost its independence, irrespective of the setback. "Inevitably, moving forward would have meant working with a partner and being consolidated into that partner. I wouldn't want to give the impression that losing the BT business made us run into the arms of Ericsson," he said.

The businesses being acquired by Ericsson account for 75 per cent of Marconi's £1.3bn turnover and include its optical networks, data networks and access networks divisions. These make the switching equipment that forms the backbone of broadband services.

As fixed and mobile telephony converge, and, in turn, telephony, internet and television are offered on a single platform, the deal will strengthen Ericsson's presence, giving it a growing share of the $10bn (£5.6bn) optical networking market. But Mr Parton said the prospects for the rump business should not be underestimated.

Carl-Henric Svanberg, the chief executive of Ericsson, said it would need to cut the 6,700-strong workforce it will inherit by up to one-fifth, although most job losses are likely to be in Germany and Italy. He said the Marconi name was a "big asset" and Ericsson would "absolutely" continue to use it, but did not specify how. There will be 100 further job losses from the 2,000 employees in the legacy businesses Marconi will retain.

Marconi shareholders will receive a cash payment of 275p per share worth £577m in total and will keep their shares in Telent. Marconi will pump £185m into the pension scheme immediately to wipe out its £141m deficit and place £490m in an interest-bearing escrow account which pension trustees can draw upon if the fund is in danger of falling into deficit again. Ultimately, Marconi aims to sell the pension fund to a large financial institution, which could free up half the £490m to be returned to shareholders.

Mr Parton has 1 million share options in Marconi, worth £4m based on last night's 369.25p closing price. He will net £2.9m from the cash handout but stressed the deal would not trigger share option awards or cash bonuses.

Pensions deal with regulator could be the shape of things to come

The Ericsson-Marconi deal has been one of the first big tests for the Pensions Regulator, which came into being six and a half months ago. Agreement of the deal, together with the resolution of what could have been a major pensions problem, has presented the regulator with its first opportunity to prove that the new system works.

Ericsson's agreement to pay £185m into the Marconi pension fund on completion of the deal, and to put £490m into an escrow account - as a further back-up for the fund - will leave the group's pension scheme as one of the best funded in Britain.

With assets of about £2.7bn and some 69,000 members, Marconi's scheme dwarfs its parent company. After the deal is complete, the scheme will be left as part of a group that is even smaller - one-quarter of the size of the current organisation.

Envisaging a potential run-in with the authorities, Ericsson and Marconi approached the Pensions Regulator to find out what would be necessary to complete the transaction.

Although Marconi's pension fund has a deficit of about £141m, on an FRS 17 basis, the regulator was always unlikely to be dissatisfied with a one-off payment to close this out. A sharp downturn in investment performance, or increases in life expectancy, could put the fund in deficit within a few years - and with the fund then relying on a smaller parent company for financial back-up, problems could have escalated.

According to Marconi, a 0.25 per cent increase in its assumed long-term rate of inflation would increase the scheme's deficit by £90m, while a one-year increase in average life expectancy would add £75m to the hole.

Ericsson's hopes of recovering half the £490m are quite realistic. In the meantime, the members have an extra level of security, to ensure that their benefits are not put at risk. Such agreements could become commonplace: the regulator says it receivesabout 40 applications a month to rubber-stamp various pieces of corporate activity.

One of the most interesting details surrounding the deal, was the suggestion that Marconi may sell on its pension liabilities. A spokesperson for the regulator saidit was "inevitable" that a secondary market for pension schemes would emerge.

James Daley

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