Zenith to Get Out of Computers, Focus on Electronics
After struggling for years to maintain both its computer and consumer electronics operations, Zenith Electronics Corp. said Monday that it is giving up on computers to devote full attention to high-definition television and other consumer electronics products.
The Chicago area-based company, the only U.S. company that still makes TVs, said it is selling its computer operation to Groupe Bull, a leading French high-technology company, in a deal valued at $635 million.
The sale, which still requires shareholder and regulatory approval, is designed togive Zenith the cash and stability that it has badly needed to make a big push in consumer electronics, an industry dominated by imports from the Far East and well-known for its cut-throat price competition. Last year Zenith successfully thwarted a takeover battle led by a dissident investment group, Brookhurst Partners, and the company indicated that it might sell some operations to boost shareholder value.
Zenith Chairman and Chief Executive Jerry K. Pearlman said the company is shedding its computer operation--which makes the highly regarded SupersPort line of laptop computers--because the company does not have the resources to adequately finance both it and the consumer electronics business.
“We are a highly leveraged company in two very tough businesses,” he said. “We couldn’t do either of them appropriate justice.”
Pearlman said the company had received offers for its consumer electronics business, but only at fire-sale prices, so it made more sense to sell the computer business.
Wall Street reacted favorably to the sale. Investors drove the price of Zenith shares up $3.25 to close at $17.75 on the New York Stock Exchange, where it was the third most actively traded stock.
“I think they chose to sell the right operation,” said Laura Lederman, an analyst with the Duff & Phelps brokerage in Chicago. Lederman said that despite public perceptions to the contrary, Zenith’s respected computer operations were not that strong, and its consumer electronics business was not that weak.
Further, Lederman said, Zenith’s computer operations, which last year generated sales of nearly $1.4 billion, could command a higher price than its consumer electronics unit, which generated 1988 sales of $1.1 billion.
Robert M. Johnson, an analyst at the brokerage house of Rotan Mosle in Houston, said that although the consumer electronics market has been soft the the last several years, the industry appears to be gaining strength. Meanwhile, he noted that the computer industry is becoming weaker, and that Zenith, in particular, was increasingly vulnerable to tough new competition from makers of lightweight laptop models.
“In six months they might have had a hard time selling the computer operations to anyone,” Johnson said.
Zenith officials said the company would use proceeds of the sale to pay off debt, which now totals about $500 million, and sharpen its focus on new video technology such as high-definition television and advanced high-resolution color displays. Along with TVs, the company’s consumer electronics unit also currently makes VCRs and video cameras.
“Zenith will emerge as a conservatively financed company better prepared to capitalize on our strengths in consumer electronics,” Pearlman said.
Analysts said high-definition television, which produces much sharper pictures than today’s television screens, is something of a gamble given the unknown size of the market and the Bush Administration’s reluctance to commit significant federal funds to its development.
The deal was seen as a coup for Paris-based Bull, parent of Bull HN Information Systems Inc. in Waltham, Mass. It also is the company’s second acquisition of a U.S. computer maker. In 1987, Bull became the major shareholder of Honeywell Bull, which took over the $2 billion computer business of Honewell Inc. Groupe Bull’s partners in the company are Honeywell and NEC Corp. of Japan.
Zenith’s 10-year-old computer division, which employs 4,000 of the company’s 37,000 workers, has been a bright performer for Zenith during a decade that was disastrous to a U.S. television industry besieged by imports.
But television prices stabilized this year, halting an eight-year slide, and are expected to rise next year, due partly to a shortage of glass for picture tubes.
Meanwhile, Zenith’s computer sales--largely due to a slowdown in government and military purchases and sharp new competition from Compaq Computer Co.--have begun to sag. Last month, the company announced it was deferring employee raises as part of a cost-cutting program to combat losses from slack computer sales.
Zenith turned a profit of $11.7 million last year after three years of widening losses, but had a net loss of $17 million for the first half of 1989.
Zenith stated that the purchase price for the computer division would be based on the net asset value of the computer business when the deal is closed, expected to be by the end of the year. That value was about $635 million at the end of July, the company said, but inventory reduction will lower the figure by year-end.
