Thomson: From Humdrum To Razzle Dazzle

The electronics giant is rolling, but there's a long way to go

If ever there was a corporate symbol for Europe's ailing Old Economy, it was France's Thomson Multimedia. In 1996, the government-owned electronics company was such a wreck that Alain Juppe, then Prime Minister, considered selling it to South Korea's Daewoo for one franc.

Good thing he didn't. Today, Daewoo is tottering--and Thomson is on a roll. An aggressive CEO, Thierry Breton, 45, has slashed costs to pull Thomson out of the red, and the company has become the hottest performer on the Paris bourse. Underscoring its break with the past, on Sept. 18, Thomson began a second round of privatization that will lower the government's stake from a controlling 51% to 35%.

HEADY STUFF. Breton is not stopping there. He wants to transform Thomson, now known for making TV sets under the Thomson and RCA brands, into a supplier of whiz-bang digital products and services. Already, Thomson has ventures ranging from an interactive version of TV Guide to Internet-enabled home telephones. He'll have plenty of cash to finance such projects, because along with the new round of privatization, Thomson is issuing new shares and convertible bonds, expected to net the company more than $1 billion. "We are reinventing this company," Breton says.

It's heady stuff--and Breton is winning plenty of converts. The believers include Microsoft, NEC, Alcatel, and the DirecTV unit of Hughes Electronics, each of which took a stake of between 5% and 7% in Thomson last year and is collaborating with Thomson on projects such as DirecTV's interactive satellite broadcasting and Microsoft's new X-box video game console. Investors are impressed, too. Although Thomson shares softened along with other technology stocks this year, they're still trading at $53, a sixfold increase since its initial listing.

Breton has his work cut out for him, though. For all the razzle-dazzle, Thomson still gets 75% of revenues from humdrum consumer products such as TVs and VCRs. Margins on these goods, and on the digital set-top boxes that are a growing part of Thomson's business, are razor-thin. Thomson eked out only a $230 million profit last year on sales of $6.5 billion. To fatten profits, Breton is looking for bigger-ticket corporate sales--for example, selling equipment to digitize video. He's also taking stakes in interactive TV ventures that could generate a steady revenue stream from advertising and subscriptions.

Sounds good. But Breton is gambling on some untested businesses. Consider the interactive TV Guide that Thomson launched in the U.S. last year with Gemstar International Group. Thomson, which builds software for the guide into its set-top boxes, hopes to rake in money from advertisers eager to catch the eye of couch potatoes clicking through the program listings. But Internet service providers have tried a similar approach, with disappointing results, says Wim Voordeckers, an analyst at Cordius Asset Management in Brussels: "I haven't seen any clear sign that profits are coming." Even Breton admits he doesn't expect Thomson's new digital ventures to turn a profit for at least two years.

OUTSIDERS. At least Breton's management track record at Thomson inspires confidence. Joining the company in early 1997 after leading a restructuring push at France's Groupe Bull, he shuttered money-losing factories in Germany and the U.S. while shifting production to Latin America and Eastern Europe. He also replaced much of top management, bringing in outsiders such as Frank Dangeard, a Harvard-trained Frenchman who formerly ran SBC Warburg's operations in France. He also cut costs by trimming Thomson's U.S. management ranks by about 20%.

True, Breton got some help from the French government, which after deciding not to unload Thomson in 1996 gave it a $2 billion bailout that wiped out its debts. But with Thomson's market capitalization now at more than $13 billion, the government is getting its money back. It's selling 25 million shares, and its remaining stake will be worth about $5 billion. Debt-laden Daewoo sure could use that money now.

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