Thomson: And The Winner Is...
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.
At this point, the French government is maneuvering behind the scenes 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, offered to create a global powerhouse in electronics, a dream various French presidents have unprofitably pursued for years. Lagardere, which is one-third Alcatel's size, proposes only to help strengthen the French defense industry by merging its missile-and-space unit with Thomson CSF's defense electronics business. Barring a last-minute change in the script, Lagardere seems destined to lose.
FAULTY LOGIC? But in the wake of huge losses at other giant state-owned companies such as Groupe Bull, the government's dirigiste ways are coming under scrutiny. Investors and analysts question Chirac's plan to create an unwieldy conglomerate making everything from semiconductors and defense equipment to televisions and telecommunications 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, which is saddled with $5 billion in debt and a consumer electronics subsidiary that lost $582 million in the first half of 1996. Since April, shortly after Tchuruk announced his takeover plan, Alcatel stock has dropped 10%, to about $86 a share. Lagardere stock has risen 8%, to $25 a share. If Lagardere wins, it will sell Thomson Multimedia, the consumer electronics business, to South Korea's Daewoo Corp.
Alcatel's original pledge to absorb both Thomson CSF and Thomson Multimedia was designed to give it a leg up, since the government openly prefers a French solution to Thomson's woes. But in July, Thomson Multimedia's horrible half-year results torpedoed that scenario. Suddenly, Thomson looked like a seriously ailing company that could swamp Alcatel. The stock of Alcatel plummeted, galvanizing several major shareholders, insiders say. Among them were ITT Corp. Chairman and Chief Executive Rand V. Araskog and Societe Generale Chairman and CEO Marc Vienot. They told Tchuruk he must pare Alcatel's debt--about 62% of capitalization--before they would back his bid. Araskog was traveling and unavailable for comment, while Vienot declined to comment.
THIN MARGINS. According to industry sources, Tchuruk and the government already had a plan to raise cash. The government agreed to 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 planned merger, announced on Aug. 30, will spin off some $2 billion in cash for Alcatel by giving Tchuruk the chance to sell some of Alcatel's stake in the new company to GEC and also to float the new company on the market. Insiders say that in return for agreeing to this flotation, GEC gets to have a 50-50 joint venture with Thomson CSF.
Alcatel denies it needs the cash from the Framatome deal to buy Thomson, but few believe that claim anymore. On Sept. 25, the French press published excerpts of a July 5 letter to Chirac from Philippe Rouvillois, former chief of the French Energy Commission. The letter discusses both Framatome and Thomson, and it details how much cash a merger of Framatome and GEC-Alsthom would generate for Alcatel.
The government might also pay off much of Thomson's debt, giving Alcatel's acquisition a chance of working. But if management is distracted, Alcatel could stumble again, as it did in mobile phones, a hot business it entered late. Much of Alcatel's growth comes from China, where margins are razor-thin. Says Christopher F.J. Tucker, telecom analyst at Paribas Capital Markets: "The problems Alcatel faces are very severe."
Another issue is that companies such as AT&T and Daimler Benz have lost billions trying to find synergies between different electronics industries. For this reason, even the French Parliament's defense commission supports Lagardere's bid. "The temptation [to create] a large conglomerate remains. But the example of Daimler Benz should dissuade us," says Parliament member Arthur Paecht.
"NEITHER IS IDEAL." At a recent press conference, 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. But analysts warn that excluding onetime items, the company's operations are still in the red. To allay investor fears further, 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: "I have a keen interest in acquiring Thomson Multimedia." 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. Chairman Jean-Luc Lagardere is not well-liked by Chirac and is an outsider who did not attend any of France's elite schools. His company has also had its disasters, including losses of $686 million from an investment in television network La Cinq. "Between the two companies, 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.