Thomson: And The Winner Is...

Alcatel, probably--which is worrisome

In mid-October, French President Jacques Chirac will bring the curtain down on one of the longest-running industrial-political dramas in France. That's when the government will privatize state-controlled defense and consumer-electronics giant Thomson, selling it either to telecom equipment maker Alcatel-Alsthom or defense and publishing conglomerate Lagardere Group.

Chirac will thus end a saga that has pitted two giant companies against each other and aroused the ire of investors and workers alike. His decision will also speak volumes on whether France is abandoning its interventionist approach to industry--or simply developing a new method of indirect meddling that merely pays lip service to free markets.

LINGERING DREAM. At this point, the French government is maneuvering to support Alcatel, a company whose chief executives have long wielded great influence with presidents and prime ministers. Even in early 1996, before the bidding for the $14.4 billion Thomson had begun, the word was out that Chirac had given Alcatel the nod. Only Alcatel, with its $32 billion in sales, has offered to create a global powerhouse in electronics, a dream French presidents have unprofitably pursued for years. Lagardere, one-third Alcatel's size, proposes only to merge its missile-and-space unit with Thomson CSF's defense electronics business, and promptly sell Thomson Multimedia, the consumer electronics arm, to South Korea's Daewoo Corp.

Alcatel's original offer to absorb both Thomson businesses appealed to the government, which openly prefers an all-French solution. Thus, barring a last-minute change in the script, Lagardere seems destined to lose. Yet investors and analysts still question Chirac's plan to create an unwieldy conglomerate making everything from semiconductors and defense equipment to televisions and phone switches. And they wonder why Alcatel chief Serge Tchuruk is taking such a risk. "The logic is lost on me," says Richard Kramer, telecom analyst at Goldman, Sachs & Co. "Tchuruk is trying to create something that went out of fashion 20 years ago."

The market fears Alcatel, which lost $5 billion last year, is too weak to take on Thomson. And in July, Thomson Multimedia announced losses of $582 million in the first half of 1996. Suddenly Thomson's problems looked capable of swamping Alcatel. The stock of Alcatel plummeted.

Yet Alcatel still seems to have the edge, thanks to several events. One is the Aug. 30 announcement that the government would merge its profitable nuclear energy business, Framatome, with GEC-Alsthom, the power engineering unit owned jointly by Alcatel and Britain's General Electric Co. PLC. Sources close to the deal say the merger will spin off some $2 billion in cash for Alcatel after Tchuruk sells some of Alcatel's stake in the new company to GEC and also floats the new company on the market. Insiders say that in return for agreeing to this flotation, GEC gets a 50-50 joint venture with Thomson CSF. Alcatel denies it needs the cash from the Framatome deal to buy Thomson, but the widespread assumption is that the money will improve Alcatel's chances.

BEST DEFENSE. Another key event was a September press conference where Tchuruk defended his strategy, saying that communications technology will be the core of future weapons systems. "You have to take advantage of linking two technologies," he says. Tchuruk also forecasts a return to operating profits by yearend and pledges to raise $2 billion from asset sales by 1997. And Tchuruk now says he will find an Asian partner for Thomson Multimedia. Indeed, Daewoo Chairman Bae Soon Hoon says if Lagardere loses the bid, he would try to cut a deal with Alcatel. Unconfirmed reports also have Alcatel planning to move Thomson's U.S. television plants to cheaper sites in Mexico. Thomson Multimedia employs 10,000 in the U.S.

Meanwhile, Lagardere has made little headway. Analysts point out that Lagardere has also had its disasters, including losses of $686 million from an investment in television network La Cinq. "Between the two, neither is ideal," says economist Elie Cohen, director of research at the National Center for Science & Research in Paris. "That's the drama of French capitalism. There isn't a buyer. So you have to find the least worst one." This time, however, shareholders, not taxpayers, will pay if the government's gambit fails.

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