February 27, 1996

Thomson to Buy West Publishing


Thomson Corp. continued its strategic move into electronic publishing and on-line information services on Monday with the announcement that it would buy West Publishing Co., a leading provider of legal research materials, for $3.43 billion in cash, most of it borrowed.

The acquisition would double Thomson's stake in the lucrative on-line legal and regulatory information research market, adding West Publishing's $825 million in annual sales from its Westlaw and other lawyers' services to the revenue from Thomson's own legal publishing division, which came to $800 million last year.

However, the all-cash deal would produce an operating loss of $30 million for Thomson's new West Publishing activities for the last nine months of this year, a drop that would be reflected, however slightly, in the company's overall net income, according to Thomson officials.

The acquisition would break even by the end of next year with a cash flow of better than $300 million to the parent, the officials said, although the full purchase price will not be repaid for another nine or 10 years.

Thomson said it expected the deal, which is subject to U.S. antitrust clearance and other regulatory approvals, to be completed by the first part of April.

While the legal address of Thomson is Toronto, its headquarters and most of its North American staff are in Stamford, Conn., where company officials, in a telephone conference call with analysts, said that the fit between the parent and its proposed new acquisition went beyond the similarity in the two companies' on-line services.

The strengths of West Publishing are in its primary law data files, the officials said, while Thomson Legal's depth is in secondary legal references and background documents. Lawyers often need both levels of research in preparing court documents.

Michael Brown, the president of Thomson, said the company's biggest acquisition ever was also its most logical.

Over the last decade, Brown said on Monday, Thomson has gradually divested itself of numerous small newspapers and other publishing interests that were heavily dependent on the vagaries of advertising revenues, to concentrate on specialty publishing, including on-line services, that generate income through subscription and on-line charges.

"We didn't want to build up a grab bag in this area," Brown said. "We wanted products that were of high utility to the user, that had long life and for which, ideally, the customer paid the bill, that were not overly dependent on the state of the economy and not overly dependent on advertising. Those were our benchmarks."

Douglas Kirk, a financial analyst in Toronto with Nesbitt Burns, said Monday that the purchase made sense.

"I think it's a very good fit with some of the businesses they have now," he said. "It's one of those things -- a slight reduction in earnings up front, but the potential for a very significant return in the longer run."

Thomson operates mainly in Britain, Canada and the United States with more than 48,000 employees and earnings of $6.3 billion last year. West Publishing, a closely held company with just 200 shareholders, employs 7,000.

Brown and other Thomson officials were at pains to justify the high purchase price -- the most Thomson has paid in a string of recent acquisitions -- for a company that deals in a product whose raw material -- millions of words from court decisions, regulatory decisions and state and federal statute books -- are all in the public domain.

They said it was West Publishing's business of analyzing, annotating and cross-referencing this flood of information that added value to the company's product.

Indeed, the company earned $206 million in operating profits on sales of $827 million, for a profit margin approaching 25 percent, for the 1995 fiscal year. Westlaw dominates the on-line legal research industry in the United States, with clients in virtually all of the nation's largest law firms.

Nevertheless, the high cost of the debt that Thomson will incur to make the planned purchase will strain the company's debt structure and will, the company expects, lead to a decline in its bond ratings in the short term.

Thomson's stock on the Toronto Exchange closed at $19.375 (Canadian), or $14.14 , on Monday, down 75 cents (Canadian), or 55 cents .

A year ago Thomson announced that its newspaper division, Thomson Newspapers, would shed 25 U.S. dailies as part of its strategy to concentrate on its marketing and electronic information systems. The company also sold more than a dozen small Canadian papers under the same strategy.

"A decade ago, in the early 1980s, we had a mixed quantity of interests that were generally unrelated to our core interests," Brown said. "Over the decade we have divested ourselves, on a timely basis and for good prices, of most of these, and at the same time we have invested very heavily to capture our core market interests."

It is a policy, Brown said, that Thomson had followed "with utterly boring consistency ever since."

When Brown joined Thomson 28 years ago, more than 90 percent of the company's revenues were from advertising, a notoriously cyclical source of income. Today, Brown said, advertising revenue accounts for about 15 percent of revenue, most of it from newspapers in the United States and Canada.

Fully 40 percent of West Publishing sales come from subscriptions, said Nigel Harrison, chief financial officer of Thomson. "We like cash that comes in first, before the product goes out the door," Harrison said. It was by design that the company's income profile had made such change, Brown added.

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