Shares of Netherlands-based Koninklijke Philips N.V. (PHG) surged 4% after the announcement of its decision to split into two companies. According to Philips, its healthcare and consumer lifestyle segments will be fused into a new company – HealthTech– while its lighting business will operate as a stand-alone business.
The strategic decision, being as big as this one, comes after careful consideration by management. The move also aims at streamlining the company’s operations and increasing focus on higher-margin areas such as healthcare systems and the consumer lifestyle segment. This announcement is part of the company’s restructuring efforts to revive its operational performance.
Financial Benefits
The restructuring is expected to generate about €100 million ($128.5 million) in savings by 2015 and around another €300 million ($385 million) by 2016. However, Philips expects to incur additional restructuring charges of €50 million.
The reorganization is expected to be completed by the first half of 2015, when the various options available for the lighting business will be clear. In the meantime, the company is evaluating the alternatives.
Synergies Moving Ahead
The HealthTech business is expected to benefit from the growing convergence of the health care and consumer sectors, with consumers increasingly using technology to proactively monitor and manage health.
Further, the health care segment has been focussingon four core areas – imaging systems (24% of revenues for the 12 months ending Jun 2014) patient care information systems (15%), home health care (10%) and health care transformation services (18%) – a division started last year to help improve the operational and financial performance of hospitals and health care systems.
The consumer lifestyle division focuses on manufacturing electronic appliances like shavers and other equipment. It comprises three business areas: health and wellness (7%), personal care (11%) and domestic appliances (15%). In fiscal 2013, the health care and consumer lifestyle businesses reported consolidated sales of approximately €14.2 billion. In fiscal 2016, Phillips expects the HeathTech business to generate growth in the range of 14% to 15.5%.
On the other hand, the lighting business comprises three divisions, providing traditional lighting appliances to complete lighting systems. The LED components business and the automotive lighting segment together contributed about 15% of the total revenue in 2013. The LED components business and the automotive lighting segment together contributed about 15% of total revenue in 2013. The automotive and LED businesses are expected to grow at a CAGR of 2% to 6% and 17% to 21%, respectively from 2013 to 2018.
Conclusion
By the first half of 2015, once the restructuring is almost complete and the final decisions are executed, Philips, one of the largest conglomerates will cease to exist. Nevertheless, the market reaction to this news so far seems encouraging as it will not only help the company to revive itself from sinking further, but will also give it a new lease of life focussing on its core business.
Philips currently has a Zacks Rank #4 (Sell). Some better-ranked companies in the electric products and miscellaneous sector include Garmin Ltd (GRMN), Universal Electronics Ltd (UEIC) and General Electric (GE). All three carry a Zacks Rank# 2 (Buy).
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