Philips originally planned to spin off its wholly-owned subsidiary Lumileds and automobile lighting business to make them an independent company by the end of the first half 2015. But on March 31, Philips announced a deal to sell a 80.1% stake in Lumileds to Go Scale Capital for an amount of US$2.8 billion, which is a rather nice price for a transaction in the LED industry.
For Philips, the transaction will allow the company to gain more funding to invest in the high-gross-margin medical product business, which still has strong potential for growth. And as for Lumileds, adjusting business structure, reducing debts and improving operation will become the priority for the new owner after the takeover, and it will raise Lumileds' flexibility in the capital market and strategy deployment.
After selling a major stake in the subsidiary, Philips will be able to focus more on its brand and medical product businesses, which are estimated to have a market output of around US$130 billion. It can now put much less effort on the not-so-profitable LED component and manufacturing businesses.
According to Philips' financial report for 2014, the medical product business contributed 42.9% of the company's revenues, up 1.9pp from 2013, while the business' earnings before interest, taxes and amortization (EBITA) even accounted for as high as 56.7% of the overall amount.
On the other hand, the lighting business including LED components and lighting products, only accounted for 32.1% of overall revenues, down 4pp from a year ago, while its EBITA share was only 31%, a lot less than that of the medical business.
Lumileds is a company that mainly focuses on manufacturing high-power LED components; however, Philips has been increasing its purchasing of low- to medium-power LED components from Taiwan and China suppliers as the market's demand for these components is rising dramatically. The production apacity for these components from Asia has also been increasing, making their prices rather competitive.
Based on Taiwan's and China's existing MOCVD machine capacity, Digitimes Research expects China's LED component capacity to account for 34.7% of the global overall volume in 2015 and Taiwan to account for 25.5%. Meanwhile, Lumileds' capacity is only expected to account for less than 3%, meaning that Asia suppliers will take the major roles of the LED industry in 2015.
Philips has almost no advantage competing against suppliers in Asia in the manufacturing sector and its lighting business including Lumileds has a scale similar to those of the medical business in terms of production costs, but far weaker profits. The selling of the Lumileds stake is a big relief to Philips, which has been burdened with high costs and strong operating pressure.
The transaction should also greatly improve Lumileds' business structure and operation to allow the company to have more choices on raising fund from the capital market, seeking partners and developing new business, as well as having flexibility on deploying new strategies.