Royal Philips Electronics NV will cede control of its 80 year-old television unit to an Asian contract manufacturer, joining European conglomerates including Seimens AG to scale back consumer electronics as prices decline.
Philips will bundle its TVs, which the Amsterdam-based company first produced in 1928, into a partnership that will be 70 percent owned by Hong-Kong-based TPV Technology Ltd., it said today. Philips will retain the rest and will receive royalty payments of at least 50 million euros ($72 million) annually from 2013 onwards.
Chief Executive Officer Frans van Houten, who took over at the start of this month, said he started exploring a new strategy for televisions after realizing that a simple “tweak” would not have stemmed years of losses. Philips lost 87 million euros from TVs in the first quarter, dragging down overall earnings, and van Houten said today he’s not yet satisfied with the company’s performance and will step up investments.
“It is a positive surprise Frans van Houten has fixed this problem so fast,” said Jos Versteeg, an analyst at Theodoor Gilissen Bankiers. “Van Houten certainly isn’t wasting any time.”
Stock Gains
Philips gained as much as 55 cents, or 2.6 percent, to 21.64 euros, the most since Jan. 11. The stock, which traded at 21.66 euros as of 10:19 a.m., has lost 5.5 percent so far this year, valuing Philips at about 21.36 billion euros.
Moving TVs into a venture accelerates a transformation of the Dutch company in the past decade from a diversified conglomerate into manufacturer of lighting, health-care products and consumer electronics including tooth brushes and electric shavers. Philips sold its semiconductor business in 2006, got out of mobile phones and sold a majority stake in a personal- computer monitor business to TPV for about $358 million in 2004.
The Dutch company reported net income of 137 million euros today, down from 200 million euros a year earlier. Analysts surveyed by Bloomberg had estimated profit of 165 million euros. Sales rose 6.2 percent to 5.26 billion euros.
“Philips has a lot of unlocked potential,” Van Houten said on a call with journalists. “We have pockets of excellence.”
Top Priority
Van Houten had made fixing the TV division, which employs 4000 people, his top priority, after his predecessor struggled to turn it around for a decade. Heading for its fifth consecutive annual loss, the television subsidiary has suffered as Sony Corp. and Panasonic Corp. cut prices to combat local Chinese suppliers.
Philips was among the last remaining mass-market producers of televisions in Europe, a niche now largely occupied by luxury manufacturer including Loewe AG of Germany and Bang & Olufsen AS from Denmark. Siemens and Nokia Oyj, the world’s largest maker of mobile phones, also once made televisions before giving up production to narrow their focus.
As part of the transaction, Philips has an option to sell the remaining 30 percent shareholding in the joint venture any time after the sixth anniversary of the date of the completion. All 4,000 employees will move to the venture with TPV when the deal is completed, Shane Tyau, director of corporate finance at TPV, said by telephone today.
“TPV and Philips see a lot of potential synergy in R&D and manufacturing capability,” Tyau said. “I don’t want market to misread that we intend to lay-off a lot of employees.”
TV Venture
Philips’s consumer division, its largest by revenue, had operating profit of 104 million euros in the first quarter, compared with 162 million euros a year earlier. Televisions will be treated at a discontinued business, Philips said today. By contrast, earnings from health-care equipment rose to 138 million euros from 103 million euros.
The company is Europe’s second-largest maker of medical technology after Siemens, which also competes with Philips in lighting. Lighting earnings fell to 152 million euros from 204 million euros. Van Houten said some of the earnings pressure at the unit came from rising commodity prices.
The company has a target for earnings per share to grow at twice the rate of sales until 2015 as Philips focuses on more profitable lighting and medical products and faster-growing markets including India and Brazil. Revenue excluding acquisitions, disposals and currency shifts will increase 2 percentage points faster than global economic growth, Philips said when it set the goals.
“As you have seen in the first quarter 2011 figures, our course and speed are not yet satisfactory”, Van Houten said, adding the company will communicate adjustments to its aspirations in the second half of this year.
Van Houten said the company predicts “headwinds” in 2011, citing the fallout from the Japanese earthquake, which will affect revenue and the company’s supply chain. The effects from the quake, which is disrupting shipments from some suppliers, will become most pronounced in the third quarter, Philips said.
Source: www.bloomberg.com
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Maulik Doshi
DENIP Consultants Pvt. Ltd.
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