Photographer: Jasper Juinen/Bloomberg

After Spinoff Success, Philips's Next Big One Holds Less Allure

  • Former unit NXP surpassed Philips this week as did ASML in '12
  • Lighting sale could buck trend amid slower growth outlook

Royal Philips NV has spawned two companies in as many decades that have now overtaken its $24 billion market value. A planned spinoff next year of the lighting business will struggle to achieve the same result.

With slower growth prospects than previous spinoffs NXP Semiconductors NV and ASML Holding NV, which benefited from tech boom-fueled demand for chips in devices like smart phones, investors may prefer to stick with the parent, a Dutch maker of medical scanners, shavers and toothbrushes.

“Lighting is a very different industry than the former spinoffs,” Marcel Achterberg, an analyst for Petercam Nederland, said by phone. “Lighting is a technology that is very old. It’s not a high-growth market.”

Former Philips divisions ASML and NXP both pass former parents market value
Former Philips divisions ASML and NXP both pass former parents market value

NXP this week ballooned to $29 billion after the New York-listed former Philips division, which was sold in 2006, completed a merger with Freescale Semiconductor Ltd. ASML, Europe’s largest semiconductor-equipment maker, overtook Philips in 2012 after gaining more than 20 percent a year since 1995 when the Dutch parent first started selling shares.

Philips is now preparing to separate from its lighting heritage, which dates to 1891 when an eponymous father and son team started selling incandescent lamps. Chief Executive Officer Frans Van Houten has yet to unveil whether the split will be done through an initial public offering or sold to an investor. A number of private firms are said to be mulling bids that value the unit at about $6 billion, people familiar with the process said last month.

LEDs Killed Light bulbs

“We’re looking both at a private sale as well as making preparations for an IPO process,” Philips spokesman Steve Klink said by phone. “A final decision will be made in the first half of 2016.”

As a standalone company, lighting would have some catching up to do to overtake its parent, which will be focused on health technology. The division last quarter reported 1.83 billion euros ($2 billion) in revenue, less than half of the combined remaining health-care and consumer-lifestyle businesses, according to company documents.

Technological innovations may not help either. The 10-year lifespan of light-emitting diodes, or LEDs, has killed the classic light bulb business, where manufacturers could depend on consumers buying replacements much more often. Consultant McKinsey & Co. expects the global lighting market to grow by 5 percent this year and next, and then taper to 3 percent annually through 2020. This is less than the double-digit sales growth NXP and ASML have enjoyed the last two years.

Lighting for Buildings and Streets

“This market is much more mature, it’s not a growth market such as where ASML and NXP are active in,” Marc Hesselink, an analyst for ABN Amro Bank, said by phone.

CEO Van Houten disagrees. The industry needs to look more broadly for growth, he said in an interview in October. New markets for lighting and other services for buildings and streets will create potential for expansion and consolidation, he said.

Also pursuing growth in these types of services is Osram Licht AG, a Siemens AG spin off and the world’s second-biggest lighting company. Unlike Philips, Siemens’ spin offs Osram, chip-maker Infineon Technologies AG and telecommunications components-maker Epcos AG aren’t anywhere near overtaking their former parent.

If Philips lighting is listed, it could be “a nice value stock or dividend stock investment case,” said Rabobank analyst Hans Slob.

This thesis is confirmed by the company itself. “The profile indeed is one of good cash flow, so one can imagine that it’ll be a dividend share, or interesting for a value investor,” Van Houten said in the interview.

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