Philips Sells DVD Business as Health Demand Boosts Profit

Bloomberg Television's Nejra Cehic profiles Royal Philips Electronics. The company produces a range of goods from lightbulbs to hospital equipment.

Royal Philips Electronics NV (PHIA), 50 years after unveiling the compact cassette for music mixtapes, agreed to sell its audio and video unit to focus on more profitable cancer scanners and energy-savings light bulbs.

Japan’s Funai Electric Co. will pay 150 million euros ($202 million) in cash and a license fee for the Lifestyle Entertainment unit, said Amsterdam-based Philips, which also invented the compact disc with Sony Corp. The deal is part of a revamp that helped quarterly profit beat analysts’ estimates.

Philips Chief Executive Officer Frans van Houten is pushing the manufacturer into high-margin areas such as lighting products that save energy and health- and wellness offerings to move away from its consumer-electronics past. The Philips veteran, now almost two years at the helm, is working through a overhaul to save 1.1 billion euros and cut 6,700 jobs.

“Lifestyle entertainment has been an absolute underperformer in the consumer lifestyle business,” said Rabobank analyst Hans Slob, who has a “buy” rating on the stock. “It’s definitely positive news Van Houten is taking more steps to improve the margins, by divesting this low-margin business.”

Beard Trimmers

Philips rose 1.8 percent to 22.33 euros in Amsterdam trading as of 1:43 p.m., valuing the company at 21.4 billion euros. The stock had gained 22 percent in 2012, while German rival Siemens AG rose 11 percent and General Electric Co. (GE) of the U.S. increased 17 percent.

The deal for the audio unit will probably close in the second half of 2013, while the video business will transfer in 2017 because of intellectual property licensing arrangements, Philips said. Funai Electric’s license agreement will last an initial period of five and a half years, with an optional renewal of five years.

Philips’ consumer business has shrunk over the years as customers flock to competitors such as Sony Corp. (6758) or Apple Inc. (AAPL) for mobile communications and music devices. The company last year completed the transfer of its unprofitable television business into a joint venture with TPV Technology Ltd. (903), offloading a business that weighed on earnings for years.

Philips’ remaining consumer division will focus on health- and wellbeing products such as beard stylers and grooming kits, electronic toothbrushes, coffee machines and kitchen appliances.

Price-Fixing Fine

Fourth-quarter earnings before interest, taxes, amortization and one-time items rose 50 percent to 875 million euros, beating the average estimate by analysts for 866 million euros. Sales gained 6.7 percent to 7.16 billion euros. Health- care revenue rose 7.1 percent, while lighting sales surged 9.2 percent. Philips plans to pay a dividend of 75 cents per share.

“Philips’ fourth-quarter earnings are a solid step,” said

William Mackie, an analyst at Berenberg Bank. “They show a progressive margin improvement with growth coming from healthcare and positive surprises with the lighting unit as consumer luminaires and lumileds were profitable in the quarter.”

The company is ahead of its own cost-savings plan as it lowered expenses by 471 million euros in 2012, Van Houten said in an interview on Bloomberg Television’s “Countdown.”

“We are most proud of the underlying profitability improvement. We are actually a little bit ahead of plan,” he said. “We continue to lower our overhead costs so that we can focus on what we’re good at.”

Health-Care Demand

Philips competes with Siemens AG (SIE) and General Electric Co. in health-care equipment such as medical scanners as well as in lighting. Siemens and GE posted quarterly results earlier this month that beat estimates, partly as a result of a rise in health-care orders with growth coming from emerging-markets such as China and stronger-than-expected orders in U.S.

The fourth-quarter net loss widened to 358 million euros from 162 million euros a year earlier, driven by restructuring costs and a 509 million-euro fine imposed by European Union antitrust regulators over price-fixing deals on now-obsolete cathode-ray tubes used in televisions and computer monitors.

For Philips’ health-care business, “orders in Europe were strong,” Van Houten said. The “U.S. showed some weakness” as the fiscal cliff and the debt ceiling made hospitals prudent.

Van Houten predicted today that sales in 2013 will “start slow and pick up in the second half” as the economic woes in Europe and the U.S. had an impact on Philips’ order book. He reiterated the company’s full-year targets.

Siemens CEO Peter Loescher said last week economic output in the euro zone will most probably decline again this year, while the economic recovery in the U.S. could pick up speed.

Lighting Revamp

Siemens’ shareholders last week approved plans to spin off the underperforming Osram lighting unit into a standalone company. Osram posted a profit of 79 million euros in the fiscal first quarter, compared with 111 million last year.

Philips said in December that reorganization charges at its lighting unit in the fourth quarter will amount to 215 million euros, exceeding forecasts by 48 percent, as it merges North American sales units and eliminates warehouses in Europe.

The measures are part of a worldwide overhaul that includes reducing the workforce and closing factories in response to falling industrywide demand for conventional lamps and the rise of light-emitting diodes. The Dutch company will drop some U.S. brands targeted at corporate customers.

To contact the reporter on this story: Maaike Noordhuis in Amsterdam at mnoordhuis@bloomberg.net

To contact the editor responsible for this story: Simon Thiel at sthiel1@bloomberg.net

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