Zenith in trouble?....................
From the Finance pages of Electronic News: February 16, 1998 Issue
One Last Rescue For Zenith
Can a new management end the consumer electronics company's long losing streak?
Promising technology, but when...
By Carol Haber and Chad Fasca
glenview, ill.--Zenith Electronics has been on a long losing streak. During the past 13 years, the
company has had only one profitable quarter. The company that used to boast of its "hand-wired"
television sets lost its share of the TV market to lower cost Asian companies that had automated
television manufacturing. Its efforts in the notebook computer business also became a cropper
and it was finally sold to Europe's Bull Computer.
Now Zenith is making still another effort to turn itself around. This one is based on Zenith's
technology in high-definition television (HDTV). To facilitate what may be a last ditch effort to
save the company, its board has brought in a new CEO and a new CFO.
The new president/CEO is Jeffrey P. Gannon, from General Electric where he had been
corporate VP for international business development. He replaces former Zenith CEO Peter
Willmott, who said in September he would retire as soon as a successor could be named. Hired
only 14 months earlier, Mr. Willmott had intended to stay until the end of 1998.
Robert N. Dangremond, a principal in Jay Alix & Associates, a New York-based firm that
specializes in corporate restructurings, comes to Zenith as acting CFO after having steered the last
two companies he headed through bankruptcy reorganizations. He replaces Roger A. Cregg, who
has resigned to take a position with another company.
To buttress the turnaround effort of the new executive team, Zenith recently secured a one-year
$30 million credit line from Credit Agricole Indosuez, after having received $80 million of new
financing in late 1997. Still the company needs even more financing to support its turnaround
plans.
In 1996, South Korean electronics company LG Electronics bought 55 percent of Zenith's
outstanding shares. Now LG is having problems of its own in its home market where the
consumer electronics business has hit the skids. "Despite what you read, LG is strong," said a
Zenith spokesperson answering questions about how the current Asian financial crisis might
impact Zenith.
'Reinventing Ourselves'
Clearly the new team faces an awesome task. For the first nine months of 1997, Zenith reported a
loss of $143.7 million, or $2.16 per share, a deterioration from a loss of $108.7 million, or $1.67
per share, a year earlier. Revenue fell 4 percent, to $825.4 million from $860.3 million.
Mr. Gannon brings to Zenith the experience of a 24-year GE career that includes a three-year
stint as the president/CEO of GE Lighting's Asia Pacific operations as well as five years leading
the company's expansion into China, Mexico, Central America and Russia.
"Jeff's extensive experience in the consumer products industry and proven track record of strong
leadership will transfer perfectly to his new role at Zenith," said H.J. Lee, Zenith's chairman, who
pledged the full support of the board.
Zenith has pinned its hopes of recovery on investments in markets for HDTV and digital set-top
boxes for cable TV subscribers. In HDTV, "our entire industry has another chance to reinvent
ourselves," said the Zenith spokesperson.
Rich On Royalties
Although the new management has yet to publicize its strategies--they are due at the time of the
quarterly report sometime near March-- one thing is sure. High on the agenda will be HDTV and
leading-edge cable products. Zenith's products are an element in the HDTV standard and
royalties promise to be rich.
The key word here is "promise." As of now, HDTV--despite an "official launch" this coming
fall--is still in limbo (EN, Feb.9, 1998). Semiconductor vendors, including Zenith, say that over
the next nine months they will have volume DTV chips available for TV sets and set-top box TV
decoders. TV set makers say they are ready. The question remains: Are the broadcasters ready
for DTV content and all the investment needed for new equipment?
Meanwhile, Zenith has informed its set-top box cable customers of the phase-out of the analog
portion of its set-top line to focus on digital. That transition should take place from the second
quarter as production of the analog product winds down.
Judging from the remarks of the very few financial analysts still tracking the company, Zenith has a
tough road to hoe.
Zenith is mired in commodity pricing for its mainstay TV sets, with a major competitor (RCA-GE)
owned by a sovereign government that "doesn't know the concept of profit," said Jim Magid of
Needham & Co. This, despite an immaculate reputation for quality among consumers. France
owns Thomson CSF which manufactures the RCA-GE TV brand.
Management problems also plague the company. "We invested $100 million in the last year at the
Melrose Park picture tube plant for new automated production processes," said Zenith's John
Taylor. "Unfortunately, the plant was not prepared from a management standpoint to make the
transition, so we had startup problems with the new equipment which affected volumes and yields.
At the same time we had anticipated significant productivity gains from the new processes and did
not realize those benefits. It was a double whammy."
The company also saw a bad debt of $20 million from a Brazilian customer.
Parlez Vous Profit?
"No one will say this," said Mr. Magid of Needham, but "had RCA priced their product to make
a return on investment of 5-10 percent, or even break even, Zenith would have been profitable
too. RCA has lost more money than Zenith. If you have someone in the game who doesn't care
how much they lose, you have a big problem. Zenith's principal competitor with a number one
market share is owned by a sovereign government with no concept of profit."
After LGE bought its majority stake in Zenith about two years ago, Mr. Magid noted, the French
were on the verge of selling the RCA business to South Korean manufacturer Daewoo
Electronics, a move that might have improved the competitive situation. French political
opposition over the deal quashed it.
"If the ownership of RCA had changed, the LG buy of Zenith would have been the buy of the
decade," he said, adding that a Daewoo buy of RCA would have been "another buy of the
decade."
At this juncture, "Zenith depends entirely on new products and not at all on the old TV business
becoming as profitable as it deserves to be." In fact, "That Zenith is still in the game is a miracle,"
he said. "No industry in America has faced, first, Japanese dumping, then Koreans and Japanese
in the 70s and 80s, and then late in the decade the purchase of RCA by the French, which
exacerbated the pressure."
When things do get better, they should get a lot better.
"Within a decade, which is a long time, there will be 25 million TV sets and 50-100 million
computers on HDTV cable, all using the Zenith patent. I envision, in a decade, 50-100 million
annual implementations of HDTV in home computers and home TVs. Maybe it will be in offices
as well. No one knows what the value of the royalties in the future is, but it's clear that it is
substantial."
When, When....
Timing was also on the mind of analyst Robert Gutenstein of Kalb Voorhis & Co. "Zenith is
involved in a number of technology initiatives that are promising, but we don't know when they
will come about," he said. "In HDTV, the problem is that broadcasters have been slow in getting
anything on the air. With nothing being broadcast, there is nothing to interest people in buying
those TV sets. But Zenith is very well positioned for HDTV--when it gets going."
The hiring of Mr. Gannon is a good sign. "It's a tough battle that Zenith has to face. But the only
conclusions I can draw...is that Mr. Gannon had a good position and a good track at GE and,
from what I can see, he would not have come to Zenith if he did not get a commitment from LG
that they would finance the capital expansion and guarantee loans to insure Zenith the ability to
continue to operate," Mr. Gutenstein said.
Like others, he expects another big loss. It's not that it isn't a saleable name. Far from it. The
Zenith brand is already revered by older generations; new marketing strategies are targeting
younger, trendier groups. "Zenith has tried to do something with marketing, and the brand seems
to have a lot of floor space at most merchandisers. But the key is selling the product at a price
that brings you a profit. All the other stuff is bells and whistles. They have to make money on the
vast majority of their business," said Mr. Gutenstein. |
