Thomson: Debt Deal to Resuscitate Equity Value

On 24 July 2009, Thomson SA (TMS), the French media technology group, said it had signed a balance sheet restructuring agreement with the majority of its creditors. The agreement stipulates 1) a 45% cut in its gross senior debt (from EUR 2.83bn to EUR 2.55bn) by converting it to equity using a EUR 350m rights issue, EUR 528m notes redeemable in shares ('NRSs') and Disposable Proceeds Notes ('DPNs'); 2) the renegotiation of terms of the remaining gross debt with the longer payment maturities and conditions are becoming more compatible with its repayment capacities (the first significant EUR 1050m maturity doesn't come before 2016 as where before a EUR 1444m maturity was approaching in 2012); and 3) redemption of all the super subordinated debt securities for a maximum of EUR 25m. With the agreement currently approved by a majority of creditors, the restructuring has eliminated the risk of bankruptcy and will bring Thomson's net gearing around 2x. This allows Thomson breathing space for the short and mid term work on its position as world leader on several of its activity segments (DVD, set-up boxes).

Although there has been lot of analyst focus on the massive extent to which shareholders will be diluted, we believe that even in a pessimistic case of dilution, it is attractive to go long Thomson under €0.70 a share. Assuming full dilution of existing shareholders and applying a discount of 20% to its peers trading at 1.0x EV/Sales 2010 -stemming from doubts about the sustainability of its business model (eg structural downtrend of DVDs), we achieve a price of €0.7, with further upside to come from 1) Thomson achieving better than expected prices for its divested businesses (more than €300 for businesses which generated €1.1bn turnover in 2008); 2) narrowing of Thomson's peer valuation discount; 3) renewed top-line growth from trough revenues; 4) Thomson's decision to redeem a portion of up to 34% of its NRSs; 5) participation of current shareholders in 100% of the €300m rights issue and €75m in the issue of the NRS.