98/183/EC: Commission Decision of 1 October 1997 concerning aid granted by France to Thomson SA and Thomson Multimedia (Only the French text is authentic) (Text with EEA relevance)
Date: 1997-10-01
Institutions: European Commission
Subjects: European Commission, France, State aid, application of EU law, control of State aid, electronics industry

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 1 October 1997

concerning aid granted by France to Thomson SA and Thomson Multimedia

(Only the French text is authentic)

(Text with EEA relevance)

(98/183/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular the first subparagraph of
Article 93(2) thereof,

Having regard to the Agreement on the European
Economic Area, and in particular Article 62(1)(a) thereof,

Having, in accordance with the abovementioned Articles,
given the interested parties notice to submit their observa-
tions,

Whereas:

I. INITIATION OF PROCEEDINGS UNDER ARTICLE

93(2) OF THE TREATY

By letter dated 10 February 1997 the Commission
informed the French authorities of its decision to initiate
proceedings (1) under Article 93(2) of the EC Treaty in
respect of measures to assist Thomson SA and Thomson
Multimedia. The measures include the recapitalisation of
Thomson SA, the parent of the public group Thomson,
notified by the French authorities in October 1996 and
amounting to some FRF 11 billion. By letter sent on 12
the Finance
December 1996 to the Commission,

Minister, Mr Arthuis, stated that the planned recapitalisa-
tion of Thomson SA would essentially benefit
its
consumer electronics subsidiary, Thomson Multimedia
and would not affect is other large subsidiary, Thomson
CSF, an industrial electronics group present
in the
defence sector which the French authorities undertook to
privatise
leading
consumer electronics group, has experienced a series of
shortfall years since the early 1990s, resulting in accumu-
lated losses which totally used up the group’s own capital.

rapidly. Thomson Multimedia,

a

investor would not have

The Commission had taken the view, in accordance with
the principle of a private investor operating in a market
economy which it applies in such cases that,
in the
absence at that stage of financial forecasts indicating that
the invested capital would yield a return at market rates, a
private
recapitalised the
company; it could therefore be concluded that the meas-
ures in question were likely to contain elements of State
aid. Since the compatibility of the measures with the
Treaty could be considered only under the exemption
provided for in Article 92(3)(c) as they were intended to
assist a firm in difficulty, their compatibility should be
assessed under the Community guidelines on rescue and
restructuring aid for firms in difficulty (2). On that basis,
the Commission asked the French authorities in its
Notice initiating the proceedings to submit a restruc-
turing plan for Thomson Multimedia establishing the
viability of the firm.

The Notice also concerned the transfer to the State of
shares in Cr(cid:130)dit Lyonnais held by Thomson SA at a price
likely to contain aid elements. The Commission had

(1) OJ C 90, 20. 3. 1997, p. 3.

(2) OJ C 368, 23. 12. 1994, p. 12.

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the group’s

acknowledged technological know-how,

and turned over some FRF 39,3 billion. Its products are
marketed under a variety of names (Thomson, RCA, GE,
Saba).
Proscan, Telefunken, Ferguson, Nordmende,
Despite
the
group suffered in the 1990s from inadequate industrial
competitiveness, essentially because its production plants
were widely scattered. At the same time its trading posi-
tions in Europe were being eroded. In a market that had
reached maturity, on which the leading producers were
industrial and
engaged in a price war,
commercial fragility caused considerable losses, generally
in excess of FRF 1 billion a year since 1992, and even
higher in 1996. As own capital had been completely used
up by the losses, the group’s net position became negative
in 1995, reaching – FRF 2,8 billion in 1996. The restruc-
turing measures taken were wholly inadequate to restore
profitability.
In the circumstances, without vigorous
restructuring accompanied by recapitalisation, the group
should be wound up. Thomson Multimedia has been able
to survive until now only because of its ability to borrow
from its parent, Thomson SA, which acted as its banker.
Such growing recourse to indebtedness, which totalled
FRF 16,1 billion by the end of 1993, far from resolving
the structural causes of the crisis, on the contrary aggra-
vated them by postponing their effects and placing
increasingly heavy financial burdens on the firm.

The parent Thomson SA was seriously affected by the
position of its subsidiary Thomson Multimedia, as it has
no manufacturing base itself and acts purely as a financial
holding company. Thus the group’s own capital
fell,
owing to the aggregate losses of its subsidiaries, from
nearly FRF 8 billion in 1990 to almost – FRF 3,7 billion
at
thus making recapitalisation or
winding-up necessary. As the Commission stressed in its
Notice initiating proceedings, without a public share-
holder able to mobilise considerable capital, Thomson
would finally have lost all access to loans on the market
by 1994 when the group’s capital became negative, and
the company would have had to be wound up.

the end of 1995,

examined the price at which the shares in Cr(cid:130)dit Lyon-
nais (CL) held by Thomson SA (3,01 % of CL’s capital)
had been repurchased by the State in an agreement dated
20 May 1996 for FRF 306,7 per share. It should be
that, as the Cr(cid:130)dit Lyonnais ordinary
remembered (1)
share is not quoted on the stock exchange, the underlying
security taken as a reference for the valuation of the
transaction was the investment certificate (IC) and that,
traditionally, a share has a greater parity rate premium
compared with an IC (ICs do not carry any voting rights).
The Commission questioned the level of the 30 % OS
(ordinary shares) premium over the IC in this transaction,
and considered that the rate used for the IC (rate of 31
December 1995: FRF 235) did not appear to be justified,
the transaction having been concluded on 20 May 1996
after a sharp fall in the IC (to FRF 164), or a loss in value
of 30 %.

The Commission considered that the measures in ques-
tion were likely to contain elements of aid and that, if so,
their compatibility with the Treaty could be determined
only under the procedure in Article 93(2) of the Treaty.

II. BACKGROUND TO THE NOTIFIED MEASURES

Thomson is a worldwide electronics group present in the
consumer and industrial electronics industry, especially
the defence industry. The State has a majority holding
(76 %)
in the parent company, Thomson SA, while
France Telecom, a public enterprise, holds some 20 %.
The remaining 4 % is held by several minority share-
holders. Thomson SA wholly owns Thomson Multimedia,
the entity which combines the consumer electronics
activities, and holds a 58 % majority stake in Thomson
CSF, which heads the industrial electronics businesses
and achieves a large proportion of its turnover in the
military defence
in
Thomson CSF (42 %) are held by members of the public
and are quoted on the stock exchange. It is also worth
noting that, until 1996, the Thomson group was a major
shareholder in Cr(cid:130)dit Lyonnais with a stake of about
20 %, of which 3,01 % was owned via the holding
company, Thomson SA.

sector. The

remaining

shares

III. REPLY FROM THE FRENCH AUTHORITIES

Thomson Multimedia (known as Thomson Consumer
Electronics until 1995) comprises some fifty companies in
the consumer electronics industry. It is the fourth-largest
group in its field in the world, and second in Europe.
Thomson Multimedia, which acquired the US manufac-
turer RCA from General Electric in 1987, is the market
leader in the US with some 20 % of the market. At the
end of 1996, the group employed some 49 000 persons

(1) OJ C 90, 20. 3. 1997, p. 7.

By letter dated 6 March 1997, the French authorities
provided the Commission with the restructuring plan for
Thomson Multimedia requested by the Commission and
their justification for the measures objected to by the
Commission in the proceedings under Article 93(2) of the
Treaty. They replied to additional questions sent by the
Commission on 2 April 1997 by two letters dated 26 May
and 2 September 1997.

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(i) Transfer to the State of the Cr(cid:130)dit Lyonnais

shares held by Thomson SA

(still high) of FRF 887
1996, would return to a level
million in 1999, giving a saving of some FRF 430 million.

In its reply, France emphasised the following points. The
CL shares, which are not quoted on the stock exchange,
were repurchased by the State from Thomson SA on the
basis of a 30 % premium on the rate of the Cr(cid:130)dit Lyon-
nais investment certificate at 31 December. The French
authorities justified the increase in value by the need to
close Thomson’s accounts for 1995 with a definitive
transaction or irrevocable commitment to buy. On that
basis, a provision corresponding to the loss in value
incurred by Thomson on the sale of
the shares was
entered into the accounts for 1995. The French authori-
ties also pointed out that the price was arrived at through
direct negotiation between the two parties and was based
on several reference values. In addition to the value of the
IC, these included the price/earnings ratio in relation to
the net assets per CL share which, on the basis of the
transfer price of FRF 306,7 per share, amounted to 66 %
at 31 December 1995, compared with an average of 80 to
100 % for comparable French banks. They also pointed
out
in
September 1993 and July 1994 had been carried out at far
higher prices (FRF 880 and FRF 774 per share respec-
tively), albeit
in circumstances that had since altered.
France considered that the IC share premium (30 %, or
the relationship between FRF 306,7 and the IC rate of
FRF 235 at 31 December 1995) was lower than the
premium applied to the two transactions referred to above
(40 to 45 %) and the premium applied to comparable
firms (43 to 56 %). In their letter of 2 September 1997 the
French authorities also stress that, whilst the IC rate was
FRF 164 on 20 May,
the day the transaction was
concluded, it was FRF 209 on 12 April 1996 when the
agreement was
and
Thomson and FRF 190 and 17 April, the day the transac-
tion was made public.

concluded between the

the Cr(cid:130)dit Lyonnais

increases

capital

State

that

(ii) Recapitalisation of Thomson SA and Thomson

Multimedia

communicated a

By letter dated 6 March to the Commission, the French
authorities
restructuring plan for
Thomson Multimedia for the period 1997 to 1999. The
plan covers a number of aspects relating to the restoration
of the firm’s viability.

Reduction of debt and financial charges

The recapitalisation of Thomson Multimedia which, it
seems, will involve almost the entire amount injected into
Thomson SA (FRF 10 866 million of FRF 11 billion
earmarked for Thomson SA), will allow full restructuring
of the balance sheet: debts will be reduced by FRF 9,3
billion as from 1997. Although the group’s net position is
negative at present, it will return to a level of FRF 7
billion after recapitalisation, the ratio of own-cpaital to
debt returning to 50/50. Thomson Multimedia will, by
reducing indebtendness, achieve savings
in financial
charges of several hundred million French francs a year.
Net financial charges, which were FRF 1 319 million in

Recovery of revenue from intellectual property from 1999

in 1987,

When Thomson purchased RCA from General Electric
it waived its revenue from patents and
(GE)
licences until 31 December 1998. The waiver covers all
patents acquired from GE and those registered since then
by Thomson Multimedia (in other words, the bulk of its
current
property). The
from intellectual
subsidiary holding the patents, RCATL, produced net
income of US$ [. . .] (*) in the United States in 1995, or
some FRF [. . .]. According to the authorities, the impact
of that revenue returning to Thomson Multimedia has
been estimated at FRF 950 million in 1999.

revenue

Restructuring plan provides for a 20 % reduction in the
group’s workforce in the period 1996 to 1998

The plan involves shutting down nine industrial plants
throughout the world, one R&D unit, a commercial unit
and large cutbacks in the sales force. A total of 10 640
the
persons are affected. The measures chiefly affect
United States (relocation of North American production
to Mexico) and Asia (relocation from Singapore to Thai-
land and from Malaysia to the Philippines). In Europe,
production will be reorganised. The R&D activities in
Strasbourg will be transferred to Rennes. Plants belonging
to the group in Germany will be shut down and produc-
tion be transfered to Angers (France). Other activities will
be shifted from Angers to Taranc(cid:155)n (Spain), and from
Taranc(cid:155)n to Poland where a new factory is being built.
The aim of the reorganisation is for production plants to
specialize in product lines. Once the industrial restruc-
turing is completed, top-of-the range and wide-screen
television sets will be produced in Angers, mid-range
products in Spain and low-range in Poland.

(*) In the published version of this Decision, some information

has been omitted on grounds of confidentiatility.

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According to the French authorities, the largest part of the total cost of the plan relates to
measures to compensate the workforce. The company estimates that the savings to be achieved by
the plan will total FRF 950 million from 1999. In view of the fact that all the costs of the plan
have already been provided for in the accounts (in 1995 and in particular FRF 1,2 billion in
1996), the savings will have their full effect on the firm in 1999. In view of the savings already
produced by the plan in 1997 and 1998, the firm will have completely amortised the cost of
restructuring by the first half of 1999.

Table A

Restructuring 1996-98

Workforce

Cost

Europe (2 plants, 1 R&D, unit, sales forces)
US (6 plants, sales forces)
Asia (2 plants)
Various

1 104
4 300
5 236

592
722
124
149

Total

10 640

1 587

(in million FRF)

Impact on
1999 result

348
552
50

950

Surge in sales of new digital products

The new digital products (chiefly digital decoders and the Digital Video Disc (DVD)), a field
where Thomson Multimedia considers it has a technological lead that places it in a favourable
position, accounted for only very small share of activity in 1995 (FRF 2,9 billion, or 8 % of
turnover). According to preliminary data from France for the end of 1996 and early 1997, a 40 %
increase in sales of these products was forecast, with the new products accounting for almost
19 % of sales by early 1998, according to Thomson Multimedia forecasts. Then in spring 1997
the firm adjusted the optimistic forecasts downwards.

Note should also be taken, in the light of the 1996 to 1999 forecasts on which the plan is based,
of a fifth very important element that is to contribute to the firm’s profitability, namely, a
predicted sharp increase in turnover, including turnover in the traditional core products (colour
televisions and video recorders), although at a slower rate. The forecasts predicted unchanged
market shares for the group in the US and the reacquisition of market shares in Europe which,
from some 14 % in 1990 (share of colour TV market), had fallen to about 11 % by 1996. The
group’s forecasts relied on a return to a share of the European market previously held in the early
1990s.

Table B

Thomson Multimedia (cid:190) forecast activity and result

Consolidated turnover

Gross margin
Operating result
Financial result
Current result
Firms equity accounted

(in millions of FRF)

1996

1997

1998

1999

39 284

42 024

44 314

7 378
– 153
– 1 319
– 1 472
3

7 914
134
– 1 031
– 897
6

8 833
756
– 868
– 112
6

46 692

10 310
1 994
– 887
1 108
6

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1996

1997

1998

1999

(in millions of FRF)

– 1 195
Restructuring
Other exceptional factors
– 17
Result before tax and distribution to employees – 2 861
– 54
Tax

– 20
– 911
– 50

– 21
– 127
– 100

Net result

– 2 735

– 961

– 227

Net position
Net debt

– 2 820
16 174

7 085
6 916

6 858
7 577

– 21
1 093
– 700

393

7 251
7 339

Apparent profitability

unknown

– 13,6 %

– 3,3 %

5,4 %

Source: French authorities and Thomson Multimedia, three-year forecasts produced end 1996.

it

the four principal

recovery factors
On the basis of
is claimed,
described above, Thomson Multimedia,
would return to profitability
from 1999 onwards,
according to the timetable set out above (Table B). The
current operating result (before financial charges) would
rise in 1999 from 1,7 % to 4,3 % of turnover, owing to
the recovery of the income from the group’s intellectual
property transferred from 1988 to 1998 to General Elec-
tric. The net result after tax would be very slightly positive
in the last year of the plan (0,8 % of turnover and about
5 % of own funds).

The French authorities have described the financing plan
for the firm over the period of the plan as follows: self-
financing will cover some 90 % of ‘current' financing
requirements (excluding restructuring and liquidation of
indebtedness). The balance and non-current requirements
will be financed from the capital increase. The injection
of FRF 10 866 million into Thomson Multimedia will
take place in three stages in the period concerned:
balance of current requirements, or FRF 732 million,
including investments not covered by self-financing (1997
and 1998), restructuring, namely FRF 1 305 million and
lastly, the largest amount, FRF 8 829 million, applied to
debt reduction.

In reply to a question put by the Commission when it
initiated these proceedings concerning measures to offset,
if necessary, any distorting effects of the aid in question,
France considered that the recapitalisation of Thomson
Multimedia would not entail any distoring effects. In
support of this claim, France took the view that the
group’s market shares would on average remain at their
present
the privileged investments would
constitute productive and replacement investments rather
than investments to expand capacity; and that, as soon as

level;

that

it was privatised, Thomson Multimedia would no longer
have easy access to loans to finance aggressive tactics.

France considered, when it notified the transaction in
October 1996, that it was the most economical solution
for the State inasmuch as, without recapitalisation, the
firm would have to be wound up. For that reason, France
had considered that it was not State aid. The authorities
had estimated that insolvency would cost between FRF 20
billion and FRF 25 billion, that is to say, at least twice the
cost of the proposed recapitalisation. When it initiated
the proceedings, the Commission challenged the argu-
in particular because the latter
ment and the figures,
made the public shareholder responsible for the social
costs and all the liquidation debts; France defended the
allocation of the liquidation debts on the basis of prece-
dents in French case-law which establish the liability of
the public shareholder for liquidation debts of public
undertakings.

Lastly, by letter dated 17 September 1997, the Minister for
Economic, Financial and Industrial Affairs informed the
Commission of the commitments France was prepared to
make with a view to the adoption of a decision, as set out
in Article 1(3) of this Decision.

IV. OBSERVATIONS OF INTERESTED PARTIES

The Commission received two observations from inter-
following publication in the Official
ested parties
Journal of the European Communities of
the notice
initiating the procedure.

By letter dated 18 April to the Commission, Philips took
the view that there was surplus production capacity in
Europe and worldwide for televisions and video recorders.
World production capacity for televisions, according to
the firm, amounted to 121 million units a year in 1995,
with annual sales of 103 millions units. The figures from

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7. 3. 98

the same source for video recorders were 67 million and
50 million units respectively. Philips considered that
capacity increases should not be supported in these areas
but that, on the contrary, it was necessary to encourage
measures to cut and rationalize production in Europe.

By letter dated 16 April 1997 the F(cid:130)d(cid:130)ration G(cid:130)n(cid:130)rale des
Mines et de la M(cid:130)tallurgie (FGMM), a French trade union
affiliated to the CFDT union, expressed support for the
principle of a capital injection not linked to a redundancy
plan. The FGMM considered in particular that the recap-
italisation as it stood was the result of previous commit-
ments made by the public shareholder, which had not in
the period 1988 to 1991 provided the financial resources
to back its industrial decisions and its plans for external
growth.

V. ASSESSMENT OF THE AID MEASURES

(i) Transfer to the State of the Cr(cid:130)dit Lyonnais

shares held by Thomson SA

The Commission noted the reply from the French
authorities concerning the increase in the value of the
Cr(cid:130)dit Lyonnais shares to FRF 306,7 at the time of their
purchase by the State from Thomson. The Commission
also studied an expert’s report prepared in November
1996 on the price of the transaction, in accordance with
the agreement between the State and Thomson signed on
20 May. [ . . . ] before materially concluding the transac-
tion in early 1997 (1), for the State to recognise that the
transaction was detrimental to its financial interests and
that it should be reviewed, an action within its power
since it has a direct majority holding in Thomson SA
(76 %), and hence has complete control over the firm. It
should also be noted that, in the report, the expert consid-
ered that the share premium of 30 % in relation to an IC
was reasonable in the present case.

The Commission cannot agree with the reasons given by
France for taking 31 December 1995 as the date for
establishing the value of
the underlying security (the
Cr(cid:130)dit Lyonnais IC). The date may if necessary be used, as
was pointed out by France, to close the accounts for 1995
and establish the value of the shares held by Thomson SA
in Cr(cid:130)dit Lyonnais. However, it is not justifiable for a
transaction signed on 20 May 1996, as the rate of the
security had meanwhile dropped by 30 %, probably
because of information on the real position of Cr(cid:130)dit
Lyonnais had reached the financial markets. The French
authorities stressed in their letter of 2 September 1997
that when the negotiations between Thomson and the
State ended, the rate of the Cr(cid:130)dit Lyonnais IC was FRF
209, whereas by the time the transaction was announced

(1) As an interim measure, the Commission having in the mean-
time initiated the present proceedings on 18 December 1996,
the authorities placed in February 1997 the funds involved in
the transaction in a blocked account.

on 17 April 1996, the closing price was FRF 190 (a drop
of 11 % and 19 % respectively against the rate on 31
December 1995). It should be remembered, however, as
the Commission pointed out in its Notice, that at the
time of the transaction the public shareholder had been,
according to information in the possession of
the
Commission, fully aware of the deteriorating situation at
Cr(cid:130)dit Lyonnais, which had subsequently necessitated the
urgent measures notified to
the Commission in
September 1996. It was already in a position to recognise
that the real value of the Cr(cid:130)dit Lyonnais security was
liable to be lower than the figure arrived at on the basis of
the IC rate of the time and, especially, that the 30 %
share premium was excessive. The Cr(cid:130)dit Lyonnais IC
price fell sharply in the weeks following the transaction,
to below FRF 120 by the end of June 1996 (compared
with FRF 164 on 20 May). The Commission notes, finally,
that the arguments of the French authorities concerning
the value of the Cr(cid:130)dit Lyonnais share in relation to the
IC are in contradiction with the total liability they attri-
bute to the public shareholder for the liquidation debts of
public undertakings (see section III above). If that line of
reasoning is pursued, the value to the State of a holding in
a public company in as precarious a situation as Cr(cid:130)dit
Lyonnais in the spring of 1996 should have been zero or
in any case less than the value of an IC, where the
exposure of holders is less extensive, being limited to the
value of their securities.

It would thus seem that, in this transaction, the State
endeavoured to protect Thomson SA interests rather than
its own, proprietary interests (in the strict sense of the
term). In any event, in order to establish a normal value
for the transaction, the Commission considers that it is
necessary at the very least to use as a basis for calculation
the IC rate on 20 May 1996 when the transaction was
concluded (namely FRF 164), which then fell by 30 % in
relation to the rate on 31 December 1995. Even if one
accepts the method used by the authorities, as well as the
level (subject to reservations) of the 30 % share premium
agreed by the parties and endorsed by the expert’s report,
the rate places a value on Cr(cid:130)dit Lyonnais of FRF 11,2
billion (. . .).

As was stated in the initiation of proceedings, the meas-
sures are liable to affect trade which accounts for some
50 % of output in the European consumer electronics
industry, and may distort competition. In so far as the
concept of State aid covers not only positive measures
such as the grants themselves but also measures which by
various means, reduce the charges usually borne by a
firm’s budget and thus, without being subsidies in the
strict sense of the term, are of the same nature and have
identical effects, it must be concluded that Thomson SA
directly benefited (from the transfer of its 3,01 % capital

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holding in CL) from State aid of FRF 145,6 million. The
aid benefited Thomson SA. It does not give the State any
rights or financial return, so that the loss of financial
revenue to the State amounts to a non-repayable grant. As
it was not notified to the Commission, it is unlawful. As it
was not jsutified by a restructuring plan of Thomson SA,
it cannot be regarded as compatible with the Treaty under
the exemption in Article 92(3)(c) (cid:190) the only exemption
possible for the measures in question, as the Commission
stated in its Notice initiating the proceedings.

(ii) Capital injection of some FRF 11 billion into
Thomson SA (cid:190) Recapitalization of Thomson
Multimedia

Distortions of competition. Effect on intra-Community
trade

is becoming
for consumer electronics
The market
increasingly globalized and dominated by Korean and

Japanese producers. The Japanese are world leaders (Sony
and Matsushita being the foremost groups in the world),
with an output value three times greater than that of the
Community (1). Their dominance is visible in world trade:
Community exports to Japan and Korea totalled only
ECU 74 million and 24 million in 1994, compared with
imports of ECU 3 390 million and 750 million respec-
tively. Despite an improvement
in extra-Community
exports in 1993 and 1994, the trade balance of the Euro-
pean Union is still structurally in deficit (ECU 10 to 13
billion). The tendency to relocate plants to countries with
low labour costs is strong, and countries such as Thailand
and China have become major producers. The three main
in descending order, Philips,
European producers are,
Thomson Multimedia and Nokia. The electronics market,
which has reached maturity (almost 100 % of homes have
a television),
its survival chiefly
depending in the next few years on the arrival on the
market of new digital products such as decoders or digital
video discs (DVD).

is expanding slowly,

Table C

(% of market total)

Colour televisions
1994

Video recorders
1994

73 %
27 %

61 %
44 %

Net Community production
Extra-EU imports

Source: Panorama of EU Industry 1997.

The Commission has taken note of the comments made
by Philips to the effect that there are production over-
capacities in Europe and worldwide for colour televisions
and video recorders. The capacity take-up rates in ques-
tion, namely 85 % for colour televisions and 75 % for
video recorders, are not exceptionally low, but can create
real tension, in particular if a manufacturer decides to
increase capacity or deliveries on a regional market the
size of Europe. In any case, Philips’ comments were not
disputed by the French authorities, which received them
from the Commission under the present proceedings. In
view of the low capacity utilisation rate for the products
regarded by Thomson Multimedia as the ‘core of
its
range', the argument of the authorities that competition is
not distorted by the notified capital injection is contra-
dicted by the firm’s own forecasts. The first task is to
separate television sets from video recorders.

(Thomson Multimedia predicts that it will only retain its
present market shares in the US, whilst in Asia they will
remain marginal). Such gains in Europe, which in 1996
accounted for 11 % of the market for colour televisions,
the firm’s leading product, should enable it to recover its
1994 market share (cid:190) over 13 % by 1999. In a market
with capacity difficulties and a slow annual growth rate in
Europe of 19-20 million television sets, the gains are
in using existing
liable to aggravate the difficulties
capacity experienced by Thomson Multimedia’s competi-
tors in Europe by transferring some of the firm’s prob-
lems to its competitors. A further drawback is that the
sale of any of the firm’s television divisions in Europe will
show a loss until 1999 at the firm cannot combat the
erosion of its market shares without incurring losses on
sales. On that basis, and with regard to that product line
in particular, the Commission considers that implementa-
tion of the plan presented by France would have the
effect of causing major distortions of competition.

forecasts

The
submitted by Thomson Multimedia
predicted gains in market share on the European colour
products
television market,

top-range

chiefly

in

The picture is very different for video recorders where,
despite the lower capacity take-up rate (75 %, according

(1) From Panorama of Community Industry, 1997, Vol. II, 1994
data. Japanese production was ECU 130 billion in 1994,
against Community production of ECU 44,5 billion.

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7. 3. 98

the restructuring plan should not

lead to
to Philips),
competitive tensions. Thomson Multimedia plans simply
to maintain its market share in this sector at 1996 levels,
that is to say, at about 8,5 % in Europe and about 20 %
in the US. In addition, it subcontracts a large part of its
VCR sales, and hence is not responsible for any overca-
pacity in that area.

It should also be pointed out that Community trade in
consumer electronics, which is considerable even before
implementation of the restructuring plan, as it accounted
for some 50 % of Community production, should be
strengthened by the plan. Once the plants at Celle and
Hanover in Germany have been closed, the firm plans to
regroup its Community television manufacturing plants
in France and Spain. Each plant will specialize in one
product line, up-market television sets being produced at
Angers (France) and mid-range products in Taranc(cid:155)n
(Spain). The move by Thomson Multimedia towards
specialized plants in Europe should, in relation to the
lead to an
position prior
increase in intra-Community trade, even after the factory
in Poland, which is to produce the down-market televi-
sions and is in the process of being built, has come on
stream.

to the restructuring plan,

State aid features

According to the market economy investor principle, and
in so far as the measures in question affect trade and
distort or threaten to distort competition, the Commis-
sion takes the view, set out in its Notice to Member
States (1), that capital injections in public undertakings
contain elements of State aid if, in similar circumstances,
a private investor would not, in view of the expected
return, have undertaken such an investment.

The restructuring plan, including the most recent version
of spring 1997, anticipates a return to equilibrium only by
1999. The forecast net result for Thomson Multimedia in
1999, which will be very slightly positive, is very much
lower than the expected losses for 1997 and 1998. In
addition, when the State injects the capital in 1997, it
must extinguish the earlier losses producing the currently
negative net positions of both Thomson Multimedia
(–FRF 2,8 billion by 31 December 1996) and Thomson
SA. The result is that, throughout the period covered by
the plan, the return on the capital invested by the public

(1) OJ C 307, 13. 11. 1993, p. 3.

shareholder is considerably below zero: at the end of the
plan (end 1999), the net position of Thomson Multimedia
will, according to its forecasts, total FRF 7 250 million.
On the basis of a recapitalisation of Thomson Multimedia
of FRF 10 886 million, the public shareholder will thus
have consented to an undiscounted loss of FRF 3,6 billion
on its injection. Discounted at a rate of 15 % (2), the
loss would be even higher. The Commission
capital
the negative return on invested capital
considers that
in
clearly indicates that a private investor would not
similar circumstances have agreed to such a capital injec-
tion and that the measures in question accordingly consti-
tute State aid as they affect trade and are liable to distort
competition.

The French authorities also pointed out to the Commis-
sion that the transaction was due to the deferral of a
recapitalisation decided on in 1987 when the electronics
firm RCA was acquired in the US, and was the action of a
prudent shareholder. They claim that the banks agreed to
act as intermediaries because of their confidence that the
State would, even with a delay, honour its commitment to
recapitalise. The Commission notes that according to
other data sent by France, part of the present recapitalisa-
tion will not be earmarked for debt reduction. Even if the
new capital were to be allocated in full
to reducing
indebtedness (due to deferred recapitalisation), the trans-
action would nevertheless continue to constitute State aid,
as a private shareholder would have required a far greater
return on capital invested than repayment of the firm’s
debts. As the firm has been unable since 1987 to repay its
growing debts without drawing on its own funds, a return
on own funds equal to or less than the debts but with a
much higher rate of return would a fortiori have been
completely impossible in the period 1987 to 1996, all
other things being equal. Ex post, it does not seem that
the ‘deferred'
reflects the behaviour of a
prudent investor. Nor have the authorities presented any
information on the extent to which, ex ante (meaning,
from the standpoint of the information available in 1987,
in particular the activity and result forecasts drawn up at
the time), such an investment appeared to be compatible
with the actions of private investor in a market economy.
As a result, the fact that the recapitalisation (or part of it)
was deferred does not alter its character as State aid.

investment

(2) A discount rate of 15 % was used at the end of 1996 by the
bank advising the authorities in the valuation of Thomson
Multimedia.

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The Commission notes the example of French case-law
presented by the authorities which establish the liability
of the public shareholder for liquidation debts over and
above any capital contributions to the firm. The Commis-
sion and the Court of Justice of the European Commun-
ities have in similar cases (1) already rejected the argument
extending the responsibility of the State as shareholder for
the liabilities arising from a liquidation beyond its share
in a company’s capital, on the ground that such an exten-
to confusing the
sion of responsibility is tantamount
State’s roles as shareholder and those as the body respon-
sible for social policy. In the hypothesis presented by
France, the case-law in question does not affect the aid
content of such a transaction as the public shareholder,
which was aware of this case-law on the basis of the 1985
law on the rehabilitation and statutory liquidation of
firms (2),
should long ago have taken the measures
currently under examination, as well as steps to restruc-
ture or wind up the firm at the start of the 1990s. It
therefore failed in this instance to act like a prudent
shareholder or investor in a market economy, as was
requried by the applicable principle referred to above.
Apart from this point, the Commission also considers that
the authorities have not furnished any proof under the
1985 Law, that the public shareholder could be equated
with a de jure or de facto manager of the company (3). If
that were so, a de facto manager would be responsible for
the firm’s liquidation debts in the event of mismanage-
ment and for the financial consequences of mismanage-
ment. Lastly, the Commission notes that, even if all these
unproven elements were established, it would not enable
the French State to side-step the application of Article 92
of the Treaty without contradicting the legal principle
that a person may not found an argument on his own
mistakes.

difficulty, their compatibility must be assessed under the
sepcific rules on restructuring aid.

The Commission guidelines on State aid for rescuing and
restructuring firms in difficulty provide that, in order for
such aid to be compatible with the Treaty, several condi-
the aid must be linked to a
tions must be satisfied:
restructuring plan aimed at restoring the firm’s long-term
viability within a reasonable time-scale and on the basis
of realistic assumptions as to its future operating condi-
tions. The firm must thus obtain a minimum return on
it will not require
capital such that, once restructred,
further assistance from the State and will be able to
compete in the market place on its own merits. In addi-
tion, measures must be taken to offset, as far as possible,
adverse effects on competitors; the aid must be propro-
tionate to the costs and benefits of restructuring and,
lastly,
taking
the plan must be implemented in full,
account of any obligations imposed by the Commission.

the Commission sought

In order to determine whether the measures to assist
Thomson Multimedia presented by the French authorities
satisfy those conditions,
the
services of an independent consultant (hereinafter referred
to as ‘the consultant') who, with the full cooperation of
the French authorities and the firm, carried out an
analysis in April/May 1997 of the restructuring plan for
Thomson Multimedia. The Commission has forwarded
the conclusions of the consultant’s report to the French
authorities, which have not contested them.

In view of the nature of the aid, which is aimed at
facilitating implementation of the restructuring plan of a
firm in difficulty, it would seem, as was indicated at the
initiation of the proceeding, that no exemptions other
than that in Article 92(3)(c) are applicable in this case. As
the transaction in question contains
substantial aid
components,
is necessary in order to establish its
compatibility with the Treaty to determine whether the
measures in question qualify for the only possible exemp-
tion in this case, namely that under Aricle 92(3)(c) and, in
so far as the measures are aimed at assisting a firm in

it

(1) Cf.

in particular Commission Decision 94/1073/EC concer-
ning Bull, OJ L 386, 31.12.1994, p. 1, and the judgment of
the Court of Justice in Joined Cases L-278/92, L-279/92 and
L-280/92 Hytasa ECR I-4103 et seq., paragraph 22.

(2) Law of 25 January 1985 on the statutory rehabilitation and
liquidation of firms, Articles 179 and 180, Journal officielle
de la republique fran(cid:135)aise, 26 January 1985.

(3) Reference may be made to the comments of Professor Guyon
in the ‘Versailles Court of Appeal' case of 29 November
1990, D 1991, p. 133, stating that
the State
appoints one or several members of a company’s manage-
ment board is not sufficient to make it a ‘de facto manager'.

the fact

that

Feasibility of the plan

According to the initial assumptions of the 1997 to 1999
plan submitted by the French authorities to the Commis-
sion in March 1997, which extended the three-year plan
for 1996 to 1998 drawn up by the firm at the end of 1996,
turnover would rise strongly. It would increase from FRF
39,3 billion in 1996 to FRF 46,7 billion in 1999, giving a
growth of 6 % per annum over the period (see Table B).
At constant figures, taking account of the extra turnover
generated by the recovery of revenue from patents and
licences, turnover would have gained 16 % over three
years (cid:190) about 5 % per annum. The predicted growth was
especially high in view of the fact that prices for the
group’s leading consumer electronics products are falling
owing to the price war between manufacturers. With
regard to the new digital products (digital decoders and
DVDs), the growth initially forecast by the company was
much higher, in the region of 40 % per annum in 1997-
98.

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The Commission expressed doubts as to whether those
forecasts were realistic, and questioned France on the
price assumptions used for the Thomson Multimedia
forecasts. By letter dated 26 May 1997 to the Commission,
France stated that the forecasts had been based on current
prices, and thus took account of price reductions of 3 to
8 % per annum on television sets and video recorders,
and far greater reductions for the new digital products. In
view of the constant fall in prices, it would seem that the
expected increase in turnover was particularly ambitious,
reflecting a real level of growth of two decimal points.
According to the authorities, however, the increase in
turnover would not be due to a higher volume of sales but
to the group’s shift to the top-range products. France also
informed the Commission that the company’s forecast
sales of new digital products had been revised downwards
at the beginning of 1997.

The Commission questioned France about
the con-
sequences in terms of result that would ensue from a
freeze at present levels of the group’s share of the market
for its core products, or from a postponement of the
development of new digital products for a year. According
to the French authorities, such a scenario would result in
a annual decline in turnover of FRF 1,1 billion by 1999
and a fall in profits of some FRF 200 million.

Thomson having only a very small market share, of 1 %
or less, in the United Kingdom, Germany and Italy, and
is not backed by advertising expenditure comparable to
that of its competitors. The Commission considers that
account should also be taken of the fact that repositioning
on one or two brands is a lengthly process which is liable
initially to result in the loss of additional market shares.
In addition,
link in Europe is
highly inadequate, with production reacting to market
information far too slowly (three months on average for
Thomson Multimedia agaisnt three to five weeks for its
main competitors).

the production-market

These factors prompted the consultant to review the sales
forecasts for Thomson Multimedia worldwide, in the USA
and, in particular, in Europe. Instead of consumer elec-
tronic sales (excluding television tubes) of FRF 22,7
billion in the USA and FRF 12,3 billion in Europe by
1999, the revised figures are FRF 22,2 billion and FRF
10,1 billion respectively. In Europe, the main difference
in relation to the company’s forecasts concerns the
predicted sales of
share
television sets,
remaining at the 1996 level (some 11 %) instead of the
recovered share predicted by the company. At consoli-
dated level, the group’s turnover would rise to FRF 43,3
billion in 1999 (cid:190) FRF 3 billion less than was predicted
in the most recent version of the firm’s plan. The revised
figure, however, still predicts a growth of 10 % over the
three years of the plan, or a little over 3 % a year. In real
terms, taking account of price reductions averaging over
5 % a year in the consumer electronics sector, the revised
scenario is still, in the opinion of the Commission, an
ambitious aim for a group whose market shares have been
eroded in the last two years.

the market

The consultant considered that, overall, the price assump-
tions were realistic and accordingly modified them only
slightly. On the other hand, the consutlant’s analysis casts
doubt on the reliability of the turnover predictions, for
several reasons. The firm’s commercial position is weak in
the regions of strong growth, Asia and Eastern Europe.
Nor should further significant growth be expected in the
USA in the period 1997-99,
in view of the predicted
maintenance of market share and the downward revision
made in early 1997 of the forecasts for the new digital
products. In Europe,
the predictions concerning the
recovery of market share for its core products appear to be
very unrealistic owing to Thomson Multimedia’s very
weak trading position. The firm has been weakened in
Europe by the fragility and dispersal of its brands (Brandt,
Saba, Telefunken, Nordmende, Feguson), none of which
is capable of competing with leaders such as Sony or
Philips. The firm’s commercial strategy is aimed at ration-
alising its brands by reducing their number
and
promoting the Thomson brand in particular. However,
the commercial repositioning is only partially underway,

Viability of Thomson Multimedia

As
the Commission indicated in the initiation of
proceeding, Thomson Multimedia would have been
unable, without the security offered by a public share-
holder, to cope with the constant deficits experienced in
the 1990s and the accumulation of debt, reaching some
FRF 16 billion by the end of 1996. Thomson Multimedia
and its parent would gradually have lost their access to the
financial market and would today be completely excluded
in view of the group’s negative net result (FRF 2,8 billion
of deficit for Thomson Multimedia at the end of 1996).

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The capital injection of some FRF 11 billion notified by
France is not in itself sufficient to restore the viability of
the group: an overall calculation shows that, even by
reducing indebtedness by an amount corresponding to
the projected recapitalization, the firm will save some
FRF 700 million a year, or considerably less than the
deficit recorded in 1996 in respect of both the current
result (–FRF 1,5 billion) and the net result (–FRF 2,7
billion in 1996, taking account of large provisions for
restructuring). As a result, the viability of the company
can be established only by taking account of the commer-
cial and industrial aspects of the firm’s restructuring plan.

In order to identify the level of profitability at which
Thomson Multimedia can be considered viable,
the
Commission takes two factors into account. The first step
is to verify that the firm’s rate of return is considerably
higher than the cost of indebtedness, otherwise the debt/
equity ratio will be negative and the firm will be unable
to finance itself through indebtedness without jeopar-
dizing its profitability, as the preceding years have shown.
France informed the Commission that the interest rate
used to calculate the marginal impact of any variation in
indebtedness was 6,5 % over the life of the restructuring
plan. But this is not sufficient, as Thomson Multimedia is
obliged to reduce its debts and secure a normal return on
own funds in order to attract risk capital, which implies a
risk premium, given the position of the firm, based on the
rate of interest on the indebtedness. The documents com-
municated by France to the Commission on the discount
rate applied to the valuation of Thomson Multimedia by
the merchant banks advising the Treasury and Thomson
in 1996 show that the rate was of the order of 15 %. The
Commission would therefore be entitled to expect the
firm to show a rate of return (return on equity) in the
region of the 15 % target by the end of the restructuring
plan submitted by the French authorities. In any event, in
order to guarantee long-term viability, the rate would have
to be at the top end of a range starting at 6,5 % (the cost
of indebtedness) and rising to the target 15 % (the cost of
own funds, according to the advisory banks). In view of
strong competition in the consumer electronics markets,
the price war being waged between the leading manufac-
turers and the need for considerable financial resources to
invest in the new generations of products, only a high
level of profitability will ensure the long-term viability of
the firm, even in adverse market conditions.

real

Canada is underway and production capacity is being
concentrated in Mexico. In Europe, the decision has been
taken to close the Celle and Hanover sites in Germany,
production being gradually transferred to Angers
in
France and Taranc(cid:155)n in Spain. The Commission attaches
considerable importance to such measures being prepared
in a
and concluded, when they become unavoidable,
context of
that
social consultation, and notes
according to the information sent by France, an agree-
ment with the trade unions was concluded in April in
Germany. A similar protocol of agreement was signed in
January with the union at the Prescott plant in Canada,
and social consultation is underway with the workforce of
the plants to be closed in the United States. The Commis-
sion also notes that the plants at Celle and Hanover were
located in the region of Hanover which is not eligible for
regional aid under Article 92(3)(a) and (c), and that the
French authorities state that those plants did not benfit
from State aid.

According to the data submitted by the French authori-
ties, the social plan involving 10 640 employees wills
produce an overall cut in the group’s workforce of 4 000
in
persons, taking account of recruitment predictions,
particular at the production plants to which other produc-
tion divisions will be transferred in part. This accounts for
a 12,3 % reduction in the overall workforce in three years.
In view of the estimated increase in turnover (3 % a year
according to the Commission’s consultant), and assuming
that the share of added value in turnover remains stable,
apparent productivity (value of output, excluding the
effects of volume) would rise by some 7 % a year. The
Commission notes that such objectives are ambitious but
there is no evidence that
they will enable Thomson
Multimedia to reach the productivity levels of its competi-
tors. In the opinion of the consultant, the margin gained
on production costs under the plan would be competely
absorbed by 1999 by the fall in prices. The consultant
considered, however, that taken as a whole, the industrial
plan submitted by the firm and the French authorities
would produce an industrial structure capable of putting
the group on the same footing as its chief competitors,
the rationalisation of product ranges would
and that
improve the performance of production units in their area
of specialisation.

From an industrial standpoint, it would seem that the
group’s lack of competitiveness is related to three main
factors:
(i) high labour costs in the USA and Europe
compared with Asian producers; (ii) the large number of
production plants, resulting in insufficient runs to amor-
tize fixed costs; (iii) too many range references. The meas-
ures taken under the restructuring plan presented to the
Commission are aimed at remedying the situation. The
closure of Thomson Multimedia plants in the US and

The industrial structure should, in the opinion of the
consultant, be capable of withstanding a pessimistic
outlook which could jeopardize the group’s production
schedule: thus if the group sells 600 000 fewer television
sets in Europe and Asia than planned (meaning 20 %
below the plan), it would not have to review its industrial
organization. The flexibility of the television production
plants, especially in Europe where the commercial risks
are highest, would make it possible to avoid an additional

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7. 3. 98

restructuring plan owing to the ratio of variable to fixed
costs, the flexibility of the Taranc(cid:155)n plant in Spain and
the ability of management to adapt the capacity of the
plant being build in Poland to meet production trends.
Such flexibility and the high variable costs in relation to
fixed costs would allow the company if necessary to
reflect only a small part of any foreseeable loss in turn-
over in its result.

The precariousness of the recovery plan mapped out for
Thomson Multimedia is, however, evident in the activity
forecasts: activity in the television sector (excluding sales
of tubes) is expected to remain in deficit until 1999, both
in the US and in Europe. In the US, the loss would be
offset by 1999 by the results obtained for other products,
in particular the range of new digital products. This would
not be the case in Europe, which is predicted to be
loss-making overall. It is only at the consolidated level,
taking account on the one hand of the margins obtained
on tube sales (Thomson Mutlimedia sells about half its
output of cathode ray tubes for television sets to other
manufacturers), and on the other hand of the recovered
income from licences and patents, that Thomson will be
able to show a profit in 1999.

The firm provided the consultant with a new scenario
drawn up in the spring of 1997 on the basis of a down-
ward correction of some of its sales projections. The new

scenario introduces a substantial change in the returns
expected after 1997. An analysis of the changes in relation
to the plan initially submitted in March to the Commis-
sion calls for several comments. First, Thomson Multi-
media, concluding that the initial forecasts for 1997 had
already become unattainable, corrected them sharply
downwards: turnover falls in value by 2,6 % instead of the
expected increase of 7 % a swing of nearly 10 % against
projections. The radical downward revision in the first
the
year of
projections
of doubt
concerning 1998 and 1999, as the risk of divergence from
initial projections increases with time.

the plan confirms the precariousness of

and introduces

an element

Secondly, although the firm has not taken account of the
fragility of the projections and corrected all the sales
projections downwards,
it nevertheless predicted a
recovery in 1998 and 1999, characterised by a 10 %
increase in turnover in each of the two years, to make up
the loss of growth in 1997. The volume growth of sales
could thus be far higher than these figures, judging by the
predicted 5 % reduction a year in the group’s prices. In a
market that has reached maturity and where growth is
slow, the forecasts for 1998 and 1999 are not, in the
opinion of the Commission, realistic.

Table D

Variations on restructuring plan projections

INITIAL PROJECTION

1996

1997

1998

1999

(million FRF)

Turnover

39 284

42 024 (+7 %)

44 314 (+5,4 %)

46 692 (+5,4 %)

Operating results

Net result after tax

134

– 961

756

– 227

1 994

393

THOMSON MULTIMEDIA’S CORRECTED SCENARIO

1996

1997

1998

1999

(million FRF)

Turnover

39 284

38 257 (– 2,6 %)

42 068 (+ 10 %)

46 029 (+ 9,4 %)

Provision for general liabilities

– 190

– 297

– 784

NB: the abovementioned provision for general liabilities is already included in the operating result predicted by the firm and
should therefore not be deducted from it. According to the firm the results are not affected by the revised sales projections
because of an even greater reduction in charges; they are therefore in line with the intial projections.

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CONSULTANT’S SCENARIO

(million FRF)

1996

1997

1998

1999

39 284

37 785 (– 2,6 %)

39 965 (+5,7 %)

43 344 (+8,4 %)

55

– 1 070

303

– 570

1 440

530

Turnover

Operating result

Net result before tax

NB: in the consultant’s scenario, the margin includes a provision for the firm’s general liabilities. The variants introduced by
the consultant (see Table C) introduce an additional corrective amount, which is therefore set off not against the provision
but the result.

Thirdly, the firm has included in its revised projections an overall provision for general liabilities
(‘risk assessment') which is to increase from FRF 190 million in 1997 to FRF 784 million in
1999. This provision was integrated upstream of the forward operating result, which has not been
altered. Neither Thomson nor the French authorities have clearly indicated the parameters for
the savings achieved, in relation to the plan submitted in March to the Commission, which would
enable the result initially forecast to be maintained with a provision of this size. However, in view
of the considerable risk of slippage from projections described above, the overall provision
appears to be justified, as a precautionary measure.

The projection drawn up by the consultant includes his own variants (see Table E) on the
Thomson Mutlimedia projection. It retains the provision for general liabilities as the projection is
a mid-range forecast and a margin of safety is thus prudent. In addition, in so far as the firm’s
forecast activity from 1997 has had to be revised downwards, the consultant considered it
advisable to retain the provision. In view of all these factors, the net result before tax would be
FRF 530 million in 1999, or 7,6 % of equity at that time. Although such a rate of return is still
not very high, it is higher than the minimum needed to deal with the group’s indebtedness and
guarantee the viability of the firm in the short term, but is insufficient, before the additional
undertakings given by the French authorities (see below), to demonstrate its long-term viability.
The projected result is not, despite the sharp downward revision of projected turnover, as severe
as might have been expected. The moderate correction is explained by the predominance of
variable costs over fixed costs which, below a given threshold, means that only a minor fraction of
the profit lost on sales is deducted from the margin. If, however, sales fell considerably below the
projected level, the variation in the result could be far more sensitive to the variation in turnover,
as that would imply a review of the industrial structure.

Table E

Variations on the company plan

Sales Europe
Sales US
Total impact

Additional opportunities:
Rationalization of product range
Reduction of the frozen zone (production-market time-lag)

(million FRF)

Variation
in turnover

Variation of
operating result

Impact 1999

Impact 1999

– 2 118
– 778
– 2 896

– 488
– 69
– 557

+35
+50

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The consultant concluded on that basis that the firm
would have difficulty in withstanding an economic
reversal or the financing of more sustained expansion.
Although the competitors of Thomson Multimedia are
also experiencing problems with profitability (cid:190) although
less severely owing to the fall in prices (cid:190) the leading
consumer electronics firms are all part of multinational
groups present in other sectors, with a total turnover of
FRF 200 to 400 billion (five to ten times the turnover of
Thomson Multimedia) and the capacity to cushion fluctu-
ating consumer electronics sales and margins owing to
their diversification. As long as Thomson Mutimedia
remains isolated, it will have difficulty in withstanding
crises on the market and, indeed, in investing in order to
benefit fully from the development opportunities offered
by new products.

to give the firm effective,

On the basis of the forecast results, the fragility of which
is demonstrated by the slippage that already occured at
the beginning of 1997, and which are therefore to be
treated with caution, the Commission considers that the
long-term viability of Thomson Multimedia, as an inde-
pendent firm, was not fully established by the restruc-
turing plan submitted to the Commission in March 1997,
prior to the additional undertakings given by the French
authorities by letter of 17 September 1997 (see below). It
should be noted that, although provision has already been
made for the costs of the restructuring plan in the 1996
accounting year, the firm will continue to show a loss in
1997 and 1998; the return to profitability in 1999 will still
be insufficient
long-term
autonomy in terms of margins and self-financing. Addi-
tional internal restructuring will therefore be necessary in
order to provide lasting viability. The cost of the extra
improving long-term profitability,
measures, aimed at
could again burden the
short-term profitability of
the
Thomson Multimedia.
Commission takes the view that only one or two solid
industrial partners, bringing industrial or commercial
synergies to Thomson Multimedia’s core products and
providing the right conditions for the internal consolida-
tion, are likely to ensure the long-term viability of the
firm. Such parnerships will enhance the value of the
group’s existing distribution networks,
in particular in
areas where it is well known, such as North America.
They could also enable Thomson Multimedia to offer new
products and services without having to bear the full
development costs and to find new commercial outlets for
its existing products and improve the return on invest-
ments. By thus increasing added value without injecting
fresh capital it should, over the period of the restructuring
plan, be possible to increase the group’s margins appre-
ciably, especially its rate of return in relation to capital. It
would thus attain the normal level of return expected by a

circumstances,

In those

prudent investor and would pursue the debt reduction
started by the present recapitalisation. The undertaking
given by France concerning partnerships, as set out in
point (a) of Article 1(3) of this Decision, helps to dispel
the doubts previously raised by the Commission as to the
long-term viability of the firm. The Commission also
notes that
the French authorities have
confirmed that they view the recapitalisation notified to
the Commission as a capital injection in full and final
settlement and do not plan to grant any further aid
reflects their confidence in the viability of Thomson
Multimedia after recapitalisation.

the fact

that

Prevention of undue distortions of competition

In view of the abovementioned distortions of competition
in sales of colour television sets in Europe, the plan
presented by the French authorities, which forecasts the
is liable to
recapture of market shares in this area,
heighten tension on this market and fails to provide for
measures taken by competitors to counter any distortions
of competition they may suffer. Accordingly, the plan
cannot be accepted as it stands and Thomson Multimedia
must limit its share of the market for colour televisions in
Europe. The Commission takes the view, on the basis of
the work carried out by the consultant, that limiting the
firm’s market shares on the market for colour television
in Europe is not only necessary but also more realistic
and is, account being taken of the production flexibility
for colour televisions, more compatible with the viability
of the firm. The Commission also considers that limiting
market shares is the most appropriate method in this
particular
of
competition whilst maintaining the necessary flexibility
to take account of market trends, owing to the possibility
of subcontracting the manufacture of television sets to
other companies.

distortions

avoiding

undue

case

of

The Commission takes note of the new undertakings
given by the French authorities in the letter dated 17
September 1997 from the Minister for Economic, Finan-
cial and Industrial affairs, as set out in point (b) of Article
1(3) of
this Decision. It considers that, by freezing
Thomson Multimedia’s share of the coulour television
market in the Community at 10 %, which is 1 % less
than the lowest historical level reached by the group in
1996, the distoring effects of the aid will be significantly
offset.

Proportional nature of the aid

According to the forecasts submitted by the French
authorities by letter of 26 May, the balance sheet in 1999
will be composed of FRF 8,2 billion of own capital and a

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net indebtedness of FRF 8,6 billion (cid:190) a ratio of net
indebtedness to own funds that is close to one. On the
basis of
the downward correction calculated by the
Commission’s consultant which predicts greater losses in
1997-98 and lower profits in 1999, the ratio is closer to
1,25 in 1999, indicating a balance-sheet structure with
relatively little elasticity.

tion in Article 92(3)(c), the one possible derogation for the
measures in question. However, France failed to provide
the Commission with any reasons why the latter should
conclude that the aid, at the time it was agreed, was
compatible with the Treaty under the exemption in ques-
tion. The illegal aid is thus also incompatible with the
Treaty.

As a result, the capitalisation of Thomson Multimedia will
continue to be unfavourable in comparison with its main
competitors in 1999. The recapitalisation measures noti-
fied by France will thus not have the effect of giving
Thomson Multimedia surplus financial resources in rela-
tion to its main competitors. Furthermore, the firm is
contributing with all the financial means at its disposal to
the financing of the restructuring plan;
it has already
made provision for
the main industrial costs in its
accounts for 1996 before it could benefit from the fresh
capital
injection by the State. In the period 1997-99,
self-financing will cover all the firm’s investment require-
ments
requirements
total
(including debt reduction amounting to FRF 9 billion),
the borrowing requirement (65 %) being covered by the
recapitalisation of some FRF 11 billion. The Commission
also considers that the aid is limited to the minimum
strictly necessary:
the net result before tax would be
reduced by FRF 65 million for each billion not injected,
which would place the firm even further away from its
targets, in terms of margins. The solution to an improve-
ment in the financial structure of Thomson Multimedia
does not, however, lie in additional funding, which would
redude its profit-captal ratio owing to the poor operating
margins. The answer lies more in structural measures
enabling margins to increase as debt is reduced.

and 35 % of

financial

VI. CONCLUSIONS

At the end of the proceedings initiated on 18 December
1996 in respect of the recapitalization of Thomson SA,
which is intended to benefit Thomson Multimedia, and
the transfer to the State of shares in Cr(cid:130)dit Lyonnais held
by Thomson SA, the Commission came to the following
conclusions:

1. Transfer to the State of the Cr(cid:130)dit Lyonnais

shares held by Thomson SA

The over-value assessed at 30 % of the price paid by the
State for the Cr(cid:130)dit Lyonnais shares held by Thomson SA
constitutes aid of FRF 145,6 million. The unnotified aid,
confirmed by the authorities on 20 May 1996 when the
agreement between the State and Thomson was signed,
precedes the restructuring plan for Thomson Multimedia
notified to the Commission in October 1996. From the
point of view of the State, it constitutes an irrecoverable
loss of earnings. The aid was eligible only for the exemp-

2. Recapitalization of Thomson SA and Thomson

Multimedia

Thomson Multimedia, the recipient of a capital injection
of some FRF 11 billion in Thomson SA notified by the
French authorities would appear to be in a precarious
situation even by 1999 when the recapitalisation and the
restructuring plan are completed. The group has consider-
able advantages notably technological skills, which place
it in a favourable position with regard to the arrival on the
market of new digital products. The firm, however, will
still be incurring losses in 1999 on its main product
(television sets), and is particularly vulnerable in Europe,
where its commercial position is insecure. The industrial
restructuring and reorganisation are necessary but there is
no certainty that they will suffice to restore long-term
viability. Further gains in productivity will have to be
identified. In view of these factors, the profitability that
can reasonably be expected will have difficulty in
ensuring the group’s long-term viability if the firm does
not conclude solid partnerships providing Thomson
Multimedia with the industrial and commercial synergies
it needs to withstand strong international competition on
the consumer electronics market. The Commission
regards such partnerships as an essential condition to its
conclusion that Thomson Multimedia will be viable. In
view of the undertaking given by the French authorities
that such partnerships will be entered into before the end
of 2 000, the Commission can conclude that such viabi-
lity exists.

The Commission considers that the projections contained
in the initial restructuring plan concerning the group’s
colour television sales in Europe are not only intrinsically
unrealistic but are incompatible with the common market
in as much as they predict that market shares will be
regained, in a loss-making situation. This would not be
possible without the notified aid. In a market with a
current capacity take-up level of about 85 %, the intro-
duction of such a strategy would result in significant
distortions of competition. The objectives therefore need
to be revised downwards, taking account of the most
recent undertakings given by the French authorities that
the share of
the television market held by Thomson
Multimedia will be limited to a maximum of 10 % of the
Community market for televisions.

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7. 3. 98

In view of the foregoing, and provided that the recent
undertakings given by France, as set out in Article 1(3) of
this Decision, are fully implemented, the Commission
considers that the aid contained in the notified recapitali-
zation of some FRF 11 billion qualifies for exemption
under Article 92(3)(c) of the Treaty and Article 61(3)(c) of
the EEA Agreement,

HAS ADOPTED THIS DECISION:

Article 1

1.
The assistance granted by France to Thomson SA in
the form of an overvalued price for the acquisition from
the latter of a 3,01 % capital holding in Cr(cid:130)dit Lyonnais
constitutes State aid within the meaning of Article 92(1)
of the Treaty and Article 61(1) of the EEA Agreement.
The aid is illegal and is incompatible with the common
market within the meaning of Article 92(2) and (3) of the
Treaty and Article 61(2) and (3) of the EEA Agreement.

The capital

2.
injection of FRF 11 billion into
Thomson SA, for the benefit of Thomson Multimedia,
constitutes aid within the meaning of Article 92(1) of the
Treaty and Article 61(1) of the EEA Agreement. The aid is
compatible with the common market and with the EEA
Agreement by virtue of Article 92(3)(c) of the Treaty and
Article 61(3)(c) of
the EEA Agreement, provided that
France fulfils the undertakings set out in paragraph 3 and
the conditions described in paragraph 4.

3.

France hereby gives the following undertakings:

(a) by the end of 2 000, Thomson Multimedia shall
conclude strategic partnerships on an industrial basis
with a view to strengthening its viability and ensuring
its long-term development
in its present areas of
specialisation and in growth sectors;

(b) Thomson Multimedia shall, until 31 December 2000,
limit its share of the market for television sets to a
maximum of 10 % within the Community; in order
to maintain profitability, the group shall take all the
necessary steps to reflect this commitment in the
development of its production plant, as regards both
existing and planned capacity. With regard to televi-
sion sets in the United States of America, and other
group products in Europe and the United States, the
group shall rigorously restrict any increase in market
share during the period 1996-98 to the objectives
defined in the recovery plan presented to the
Commission;

(c) within the next few months, Thomson Multimedia
shall, in addition to the industrial recovery plan, take
steps to improve its commercial policy and brand
policy along the lines advocated by the Commission
consultant;

(d) the Commission shall receive a six-monthly report on
the implementation of
the recovery plan and on
compliance with the abovementioned undertakings.

In addition, the French Government shall confirm that it
views the recapitalisation notified to the Commission as a
capital injection to settle all outstanding accounts and
that it does not therefore plan to grant any further aid in
future (with the exception of aid in the Community
interest such as research and development aid); in the
event of unforeseeable circumstances justifying a capital
contribution on terms satisfying a prudent investor, the
inform the Commission
French Government
thereof in advance and shall comply with the relevant
provisions of the Treaty.

shall

To ensure that

4.
the aid is compatible with the
common market, the French Government shall comply
with the following conditions:

(a) Thomson SA shall allocate the entire sum intended
for
recapitalisation to the recapitalisation of
Thomson Multimedia and shall use the aid only for
the purposes defined in the plan;

its

(b) Thomson Multimedia shall carry out the restructuring
measures in the 1997-99 plan submitted to the
Commission and shall not alter the conditions set out
therein,
the conditions
taking account of
imposed by this Decision, without seeking the prior
approval of the Commission;

after

(c)

the French authorities shall provide the Commission
each year with the social accounts of Thomson SA
and Thomson Multimedia;

(d)

the undertaking to limit shares of the market for
television sets purusant to point (b) of paragraph 3
means limiting the share to 10 % by value of the
market for televisions in the Community;

(e) monitoring of the undertaking given in point (d) of
the group’s products
paragraph 3 shall cover all
worldwide throughout the period of the restructuring
plan and, as regards television sets in the Community,
until 31 December 2000. It shall include production
trends, sales and market shares held by Thomson
Multimedia in Europe and worldwide; it shall include
indicators comparing the prices of its main products
in relation to those of its competitors in Europe. Such
monitoring shall be carried out on the basis of specifi-
cations on which the Commission shall be consulted,
and shall be entrusted to an independent expert
appointed to that end in agreement with the
Commission;

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(f)

the French authorities shall inform the Commission
in detail of any changes affecting Thomson SA and
Thomson Multimedia;

(g) save

exceptional

in unforeseeable

circumstances
occurring outside the firm, the recapitalization shall
be granted to Thomson Multimedia as a full and final
payment; the French authorities shall not grant any
further aid to that firm in the future (with the excep-
tion of aid in the Community interest such as
research and development aid);

(h) the carry-over of

firms

losses giving entitlement

shall comply with point 3.2.2(c) of

to tax
credits
the
Community guidelines on State aid for rescuing and
In particular,
restructuring
members of the Thomson SA group may not benefit
from the carry-forward of tax losses prior to 1997
incurred by Thomson Multimedia in the amount of
the tax losses covered by the capital increase notified
to the Commission.

in difficulty.

responding to the element of State aid contained in the
proceeds of the transfer to the State of the Cr(cid:130)dit Lyon-
nais shares held by Thomson SA, namely 3,01 % of the
capital or FRF 482 million. The pro rata financial
income generated by the excess value on the blocked
account shall also be recovered.

Article 3

France shall inform the Commission of the measures it
has taken to comply with this Decision within two
months of its notification.

Article 4

This Decisision is addressed to the French Republic.

Done at Brussels, 1 October 1997.

Article 2
France shall require the repayment from the blocked
account opened for the purpose of the present transaction
of the excess value amounting to FRF 145,6 million cor-

For the Commission

Karel VAN MIERT

Member of the Commission