The Dutch conglomerate Koninklijke Philips NV (ADR) (NYSE:PHG) (AMS:PHIA) is splitting off its lighting business in a bold move to enhance its higher-margin healthcare and consumer divisions.
Juiced by the announcement, Koninklijke Philips NV (ADR) (NYSE:PHG) (AMS:PHIA) shares rose 3.5% to €24.33 in Amsterdam.
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Koninklijke Philips break into two
In an announcement made Tuesday, Koninklijke Philips NV (ADR) (NYSE:PHG) (AMS:PHIA) said it would break itself in two by merging its health care and consumer-electronics divisions and creating a stand-alone lighting business. The Dutch company said it would offer more details next year.
While unveiling the plans, Koninklijke Philips NV (ADR) (NYSE:PHG) (AMS:PHIA) chief executive officer Frans van Houten said the latest move should position the company well for the next century. He said: “A 123-year old company needs to keep reinventing itself. If you don’t do that, you become obsolete”.
Exuding confidence over the announcement, he said Philips’ split will create two market-leading businesses in health care and lighting. He confirmed that both businesses will continue to operate under the Philips flag and will be based in the Netherlands.
The conglomerate’s health care business logged €15 billion ($19 billion) in sales in 2013, while the lighting business made €7 billion. The company anticipates deriving a total of €300 million cost savings in 2015 and 2016 from the split.
Confront the competition
As reported earlier, while unveiling its second-quarter financial results in July, Houten indicated a decision to create a stand-alone company composed of Lumileds (LED components) and automotive lighting businesses within Koninklijke Philips NV, thereby demonstrating the company’s commitment to enhance its sagging financial performance. The company also indicated its aim to restructure the management of its healthcare business.
Earlier this year, both Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) and Koninklijke Philips NV (ADR) (NYSE:PHG) (AMS:PHIA) indicated their plans to continue to execute growth strategies as they anticipate tougher market conditions.
Interestingly, German engineering giant Siemens AG (ADR) (NYSE:SI) (FRA:SIE) (ETR:SIE) spun off its light bulb maker and Koninklijke Philips NV (ADR) (NYSE:PHG) (AMS:PHIA) competitor Osram last year. Last week, Germany’s Bayer said it was spinning off its plastics business to focus on its more profitable life-science operations.
While unveiling the split on Tuesday, Houten said it wasn’t clear whether the lighting business would be sold off to investors, or listed on the stock exchange, but the move would bring enhanced returns for investors. He indicated the split will take up to 18 months and would make it easier for both companies to raise money and invest.