The woolly corporate mammoths of Europe are attracting American activists. Electronics giant Koninklijke Philips NV seems keen to avoid becoming a hunting target. It's doing the sort of things activists usually like, yet its actions may just spur an unwanted assault.
The group's latest move is the pricey $1.7 billion all-cash acquisition of U.S. medical technology group Spectranetics Corporation. Simultaneously, there's a 1.5 billion euro ($1.7 billion) share buyback. Philips casts these as evidence of its concern for intelligent capital allocation, with the goal of improving shareholder returns. The moves tighten its flabby balance sheet, which had net debt of less than 1 times trailing Ebitda at the last count.
Buybacks, growth acquisitions, balance sheet optimization, capital allocation -- good activist buzz words. Conveniently, Philips' news came after London's Sunday Times reported earlier this month that Third Point LLC, the investment fund targeting Nestle SA, is buying shares in the Dutch company. Third Point has pushed for Nestle to gear up, simplify and do acquisitions in growth areas.
Philips has been acting shareholder-friendly of late. The separation of its lighting business via an initial public offering last year was a success. Both shares have strongly outperformed their benchmark over the past year.
But it's a stretch to say the latest moves are wise capital allocation. The U.S. acquisition is pricey. Philips is buying in a heated sellers' market for U.S. medical devices companies. Adding assumed net debt, the multiple of 6.5 times forward sales looks high. Spectranetics isn't expected to make an annual operating profit until 2019. Sure, Philips boss Frans Van Houten has indicated an appetite for bolt-on deals, but this is a bit big to be called that.
With that in mind, the buyback serves as a sop to shareholders to swallow the leap-of-faith deal. Still, this isn't bullet-proof either. Philips shares hovered in the mid 20-euros between 2013 and 2016 when it last bought its stock. Now it's planning to mop them up at about 32 euros, a forward price-earnings ratio of 25. Hardly bargain basement.
The high valuation and recent share price performance probably limit the scope for further activism-driven returns. Even Third Point might be wary of its chances of a successful campaign in the Netherlands after the backlash provoked by PPG Industries Inc.'s attempted takeover of Akzo Nobel NV.
Still, there's a case for more change at Philips. The obvious question is the future of consumer businesses, which sits awkwardly in a company strengthening its focus on medical technology. Razors don't obviously belong, other than reinforcing Philips as a bathroom brand. Disposing of these would be an obvious activist clarion cry. If Philips wants to see off the marauders, it may be better to sell rather than buy assets when prices are high.
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(Corrects date range in sixth par.)
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