Dec. 19 (Bloomberg) -- Royal Philips Electronics NV, the world's biggest maker of light bulbs, will buy back 5 billion euros ($7.2 billion) of stock in its biggest such program ever.

Philips will buy back the shares ``within the next two years,'' the company said in an e-mailed statement today. Amsterdam-based Philips has bought back 820 million euros of shares as part of an earlier 1.63 billion-euro program, which will now be canceled.

Philips is using proceeds from selling semiconductor holdings to bolster the medical and lighting divisions and return cash to shareholders. The company has said it will have as much as 20 billion euros available for acquisitions, dividends and share buybacks over the next three years. A new tax plan adopted by Dutch parliament yesterday will allow companies to buy back more stock without paying a withholding tax starting on Jan. 1.

``This is a really nice start with upside potential,'' said Marcel Achterberg, an analyst at ING Wholesale Banking in Amsterdam who recommends buying the stock. ``It illustrates they're confident.''

Philips rose 40 cents, or 1.3 percent, to 30.40 euros in Amsterdam trading, a two-month high. The stock has gained 6.4 percent this year, compared with a 1.5 percent gain in the Amsterdam Exchanges Index.

Fiscal Change

Until the new law becomes effective next month, Dutch companies must pay the tax when a buyback exceeds a certain amount. The new plan doubles the exempted amount, according to the proposal posted on the Finance Ministry's Web site.

``This new program has been enabled by a more investor- friendly tax regime in the Netherlands that Philips has been advocating for a while and which will increase the tax efficient share repurchase capacity of companies within its scope,'' Chief Executive Officer Gerard Kleisterlee said in the statement.

Philips will finance the buyback using its cash position, Philips spokesman Arent Jan Hesselink said in a telephone interview. The company is ``willing'' to increase debt to pay for buybacks and acquisitions, he said.

Siemens AG, Europe's largest engineering company, last month said it would buy back as much as 10 billion euros of stock by 2010 with cash from a disposal, responding to investors' demands for a buyback.

Investor Pressure

Investors Jana Partners LLC and D.E. Shaw Group, which own about 1.6 percent of Philips, on Dec. 8 said they teamed up to review Philips's results and capital structure. The buyback is part of the company's long-term strategy and isn't linked to the letter from the investors, Hesselink said.

``Giving sweet cash is the best way to please disgruntled shareholders,'' said Wing-Yen Choi, an analyst at Theodoor Gilissen in Amsterdam, who recommends buying Philips shares.

The company has bought back 5.2 billion euros of shares and completed or announced 6.5 billion euros of acquisitions since 2005, Philips said in today's statement.

In a separate statement today, Philips said it agreed to sell its set-top box and connectivity solutions businesses to Pace Micro Technology Plc.

In exchange, Philips will receive 70 million Pace shares, representing a 23 percent stake in the company. The stake is valued at 63.9 million pounds ($128 million) based on yesterday's closing share price.

Credit-default swaps on Philips increased 2 basis points to 45.5 basis points, according to Deutsche Bank AG. Credit-default swaps, used to speculate on a company's ability to repay debt, rise as perceptions of credit quality worsen.

To contact the reporter on this story: Marcel van de Hoef in Amsterdam at mvandehoef@bloomberg.net

Last Updated: December 19, 2007 11:50 EST