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Just How Much Can Thomson Deliver?


Is Thomson Corp. finally ready for prime time? Kenneth R. Thomson thinks so. Over the past six years, the 78-year-old Canadian tycoon has single-mindedly led the $7.2 billion (U.S.) company that bears his name through a full makeover.

Once a Canadian newspaper conglomerate, Toronto-listed Thomson has become a U.S.-focused seller of data to financiers and lawyers. Operated out of Stamford, Conn., it reports results in U.S. dollars. Now Thomson--whose $22 billion market cap is bigger than four-fifths of the Standard & Poor's 500 companies--is ready for the last stage of its makeover: a U.S. stock listing. The company wants to move its stock trading to New York as part of a $1.5 billion share offering later this year. Thomson--who owns 73%--and the company are expected to sell a 7% stake, with each taking half the proceeds.

For investment bankers, Thomson is a great sell: a sleek producer of steady earnings with a kick ahead from a Wall Street recovery. But the offering may be a letdown. Thomson shares already trade at a pricey 34 times estimated 2002 earnings.

To justify a higher stock price, the company will have to boost earnings by making substantial investments. The problem is, Thomson's debt is now $4.4 billion, or 54% of shareholder equity, vs. 35% a year ago. "Compared with Thomson historically, their debt levels are high and their cash is low," says Kenneth B. Marlin, an investment banker whose firm, Marlin & Associates, specializes in electronic data companies. The offering and listing are key to Thomson's ultimate goal of giving the company the firepower to compete with information rivals such as Reed Elsevier, Reuters Group (RTRSY), Bloomberg, Pearson (PSO) and The McGraw-Hill Companies (MHP), owner of Standard & Poor's and publisher of BusinessWeek. Thomson brands include First Call, which tallies earnings estimates; Westlaw, the legal publisher; and Harcourt textbooks.

Legal publishing gives Thomson about half its revenues. But long-term, its growth is expected to be only 4.5% a year. Execs have said they're counting on 10% growth in financial information. To capture that, says Marlin, Thomson should target such acquisitions as Moody's, the debt-rating service; Barra, which sells portfolio management tools; and FactSet Research Systems. They're within range. The market cap of the biggest, Moody's, is less than a third of its own. Thomson CEO Richard Harrington recently told analysts he is not looking for a major deal.

But he faces the same problem that has plagued information services since the advent of the Internet: New technology and low barriers to entry keep turning lucrative niches into commodity businesses. Some half-dozen other firms distribute earnings estimates, says Jack McConville, editor of Market Data Industry. "Everyone can rank industries and compare estimates," he says.

So for the same price, Thomson must deliver more data and integrate it into brokerage and portfolio management systems. That's why operating profit margins in financial lines fell in 2001, to 16.2%, from 18.3% in 2000. Last year, Thomson earned $657 million, or $1.05 a share, from continuing operations. Analysts expect about the same this year, according to estimates compiled by First Call.

"It is a very well-run company. I'm just not sure about the valuation at these levels," says Warren J. Balzer, an analyst at Edward Jones, a brokerage in St. Louis that rarely underwrites stocks and doesn't have an interest in this deal. Balzer does not expect earnings per share to grow more than 12% annually long-term, which isn't enough to justify its p-e of 34. He rates the stock "reduce," which is, after all, exactly what Kenneth Thomson plans to do.

Maybe investors should take heed. The company's repackaging shouldn't lull them. Depending on fickle financial business won't be a smooth ride. By David Henry in New York


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