Great Titchfield Street, London -- The finance sections of the Sunday papers often contain many juicy stories. But they always need to be taken with the appropriate pinch of salt. With all the previous week's news digested, the Sundays have to offer something new to entice readers to the read the glossy adverts. One method is the 'bait' story. A company will want to sound out investors about a possible course of action. So an 'unofficial' story will appear in one of the Sunday broadsheets, just like Marconi's (LSE: MONI) proposal for a £1b rights issue did yesterday.
The theory goes that a company can monitor the reaction to the unofficial story and then fine tune, or radically alter, its plans accordingly. In this case, Marconi is supposedly considering a big rights issue to reduce its debt pile, but would only consider doing so if the company's share price doubled (or more) from its current level of 41p. There's probably some truth to the story; after all, it is a management team's job to consider all the alternatives. No doubt a rights issue is one possible route. It would be a surprise if this hadn't been mentioned in discussions with its largest investors.
At the current share price, Marconi's market value is just over £1.1b, meaning the number of shares in issue would have to almost double if the latest story is true. At 80p, the number of shares would only have to increase by 50%. Whilst that is still significant, it is much more palatable. But it has to be said that, if Marconi's share price does recover to 80p, it will probably be as a result of an improvement in its trading, which might make a rights issue academic. In fact, there have been mentions of a 100p-plus rights issue, which would mean the company was valued at £2.8b, or over 50% of current sales levels. That looks highly unlikely in the absence of any miracle recovery.
However, Marconi still seems to be heading in the right direction. Today's sale of its optical components business to Bookham Technology (LSE: BHM) is another step in clearing its corporate cupboard. Unfortunately, Marconi is receiving shares rather than cold hard cash for this disposal. The truth is that nobody really knows what will happen with Marconi, least of all the traders who have caused its share price to be so volatile in the last few months. The current price seems an appropriate balance between the rewards of a recovery and the risk of a further decline in its trading, at least until new information comes to light.
More: Marconi discussion board
The writer has a beneficial interest in Marconi.
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