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Philips to Split Lighting, Health Tech Businesses

"Great companies need to reinvent themselves."

Reuters / Toussaint Kluiters / United Photos

Philips, the Dutch conglomerate that started life making light bulbs 123 years ago, is splitting off its lighting business in a bold step to expand its higher-margin health care and consumer divisions.

Putting the lighting business in a separate company is part of a wider strategy that began with Philips’ move out of less profitable consumer electronics and into fast-growing health care markets, largely in emerging Asian markets.

The decision to split the company in two marks a definitive break from its origins in the southern Dutch town of Eindhoven, where Gerard Philips and his father, Frederick, founded one of the earliest makers of incandescent light bulbs in 1891.

Philips, which invented the audio cassette and compact disc, grew into a world-leading electronics company by the 1960s but it has always been ruthless about moving out of less profitable businesses, such as audio and video, vinyl records and TVs.

Unveiling the split on Tuesday, Philips Chief Executive Frans Van Houten said it was not clear whether the lighting business would be sold off to investors or listed on the stock exchange, but the move would bring better returns for investors.

“I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step for Philips,” Van Houten said.

“Great companies need to reinvent themselves. We can do that, we can stay relevant, we can grow and we can stay successful. It takes courage, but it’s a path we’ve been preparing for carefully.”

Van Houten declined to comment on whether either new company could become a takeover target: “Our decision is not driven by fear of what other companies may do.”

The Philips split will take up to 18 months and would make it easier for both companies to raise money and invest, he said.

The new structure should save 100 million euros ($128.5 million) next year and 200 million euros in 2016. It expects restructuring charges of 50 million euros from 2014 to 2016.

The Philips move is another example of companies overhauling long-standing structures. Last week, Germany’s Bayer said it was spinning off its plastics business to focus on its more profitable life-science operations.

German engineering giant Siemens spun off its light bulb maker and Philips competitor Osram last year.

Philips shares, which have underperformed the broader market and are down nine percent this year, rose 2.4 percent to 24.07 euros in trading in Amsterdam.

Splitting the company would be good for valuations, said Rabobank analyst Hans Slob: “It will eliminate the conglomerate discount; I always used a five percent discount for the sum of the parts valuation.”

Philips said in July it would combine its light-emitting diode (LED) and car lights division in a stand-alone firm to focus on an LED boom as the world switches from incandescent bulbs to more efficient and durable lights.

“The entire dynamics of the lighting market are changing,” Van Houten said on Tuesday. “Value is moving toward systems and services,” including, for example, managing cities’ and companies’ complete lighting systems.

But a price war for LED bulbs is hurting profits, leaving Philips and Osram scrambling to develop new technology and seek out new market segments.

Philips has a history of building up and spinning off successful businesses, among them chip equipment maker ASML, which is now larger than Philips, and Polygram, the music label and film company that was merged with Universal.

Philips said its latest move would create two market-leading companies, HealthTech, with sales of 15 billion euros, and Lighting, with both companies using the Philips brand.

Philips said it would move the seven-billion euro lighting business into a separate legal structure and consider various options for “alternative ownership structures with direct access to capital markets.”

In a revised outlook, Philips said adjusted earnings before interest, taxes, depreciation, and amortization in the second half of 2014 were expected to be slightly lower than the same period a year earlier.

In the health care business, core profit in the second half of 2014 is also now expected to be lower than the reported core profit in the second half of 2013.

(Editing by David Clarke)

This article originally appeared on Recode.net.

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