Thomson SA Fears Covenant Breach; To Shed Units

The company, whose customers include major Hollywood film studios and telecom operators such as France Telecom SA (FTE), also outlined plans to shed operations that generated about EUR1 billion of revenue in 2008, as it seeks to concentrate its activities on providing services to content creators under its Technicolor brand.

The tough business environment Thomson faces was again highlighted as the group posted preliminary fourth-quarter revenue down 8.2% on a constant currency basis to EUR1.47 billion.

Thomson, which supplies set-top boxes, video-production services and DVDs, has suffered as the financial and economic crisis has hit consumer demand for its customers' products and services.

"We have an adequate level of liquidity to finance our activities but the restructuring of our balance sheet is the necessary precondition for putting into action our new strategy," Chief Executive Frederic Rose said on a conference call with reporters.

Thomson said that some of its private placement notes contain covenants requiring the net debt to net worth ratio at Dec. 31, 2008, not to exceed a ratio of 1 to 1.

According to preliminary, unaudited data, it is "likely" that when the audited financial statements for 2008 are published this covenant will be breached, said Rose, who took up his role as CEO in September and vowed in October to make cash generation and debt reduction his main objectives.

"They announced what everyone was expecting except that they don't have a solution to offer," said a Paris-based analyst.

At 1322 GMT, Thomson shares were down 17%, or EUR0.22, to EUR1.08 compared to a 1.4% decline in France's SBF-120 index.

Before Thursday, the stock had declined 84% in 12 months, significantly underperforming the SBF-120, on concerns over the company's financial health.

As recently as October, Thomson had insisted that it expected to satisfy the covenants at the end of 2008.

In a statement Thursday, the company said its estimated net debt at Dec. 31 was EUR2.1 billion, corresponding to a gross debt of EUR2.9 billion and a cash position of EUR0.8 billion.

Thomson said it intends to discuss a resolution of any potential future covenant breach with the noteholders to head off demands for accelerated payement of the notes, "which could trigger acceleration of substantially all of the group's senior debt."

The group also remains in talks with private and public sector groups, including the French government's strategic investment fund, "to reinforce our equity," said Rose.

Financial advisors Perella Weinberg Partners and Ph. Villin Conseil, as well as the law firm Davis Polk & Wardwell, are assisting Thomson in the process.

The activities Thomson is planning to divest include its Grass Valley broadcast equipment unit and Premier Retail Network in-store TV network operations.

The group has received "a certain number of expressions of interest" in the activities, Chief Financial Officer Stephane Rougeot said, adding that in the current environment it is "extremely difficult" to give a timeframe.

Rose said Thomson will give more details about its strategic revamp when it reports 2008 earnings March 10.

Company Web site: www.thomson.net

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