London/Amsterdam: Royal Philips NV chief executive officer (CEO) Frans van Houten plans to break up the 123-year-old Dutch company, separating the lighting unit and focusing on health-care equipment and consumer goods spanning shavers to air purifiers.
Philips will create a single division called HealthTech from its healthcare and consumer goods operations generating €15 billion ($19 billion) in sales, the Amsterdam-based company said on Tuesday in a statement. Lighting operations will become a stand-alone company with €7 billion in revenue, and a new ownership structure will be considered.
Van Houten, who took the helm in 2011, is combining healthcare and consumer operations to tap demand for gadgets that allow consumers to control and track their health or sports activities. The CEO meets analysts and investors in London on Tuesday to outline his reasoning for breaking up one of the Netherlands’ most iconic companies. “It’s a bold move,” said Marc Hesselink, an analyst at ABN Amro in Amsterdam. “It shows the company’s focus on one point, healthcare.” Philips climbed as much as 4% to €24.45 in the Dutch capital on Tuesday, the biggest intraday gain since June. The stock was up 3.5% as of 9:21am, valuing the company at €23.3 billion.
“I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step,” the CEO said in the statement. Van Houten has been focusing the company on more profitable businesses to keep up with competitors such as General Electric Co. and Siemens AG. Earlier this year, the company sold its television division and the DVD and multimedia divisions—which are the company’s heritage—and announced it would create a stand-alone company from its lumileds and automotive lighting.
Philips said it will start moving its lighting business into a separate legal structure and consider various options “for alternative ownership structures with direct access to capital markets.” Van Houten expects the process to take 12 to 18 months and said lighting will be on its own feet in 2016. The market for lighting, led by Philips, is shifting from basic demands for products to more complex systems and services, and separating the company will enable it to have a sharper focus and investment strategy, van Houten said.
The decision to move lighting into a stand-alone company to drive growth is similar to a move by Siemens AG. The German rival last year spun off its entire lighting division as the industry gets to grips with stiffening competition. The new HealthTech company will be dominated by sales of imaging systems, while the lion’s share of lighting sales will come from light sources and electronics, the company said. Philips reiterated 2016 goals, including a compound annual growth rate for comparable sales of 4% to 6%, with an earnings before interest, taxes and amortization margin of 11% to 12%. A purge on costs to raise profitability will lead to an extra €100 million in savings next year, rising to €200 million in 2016. These additional savings come on top of already announced €1.5 billion in cost cuts by 2015.