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Philips Offloads 80% Stake in Lumileds to Apollo for $1.5B

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With the year drawing to a close, Koninklijke Philips NV (PHG - Free Report) was finally successful in offloading a major stake in its lighting business – Lumileds – after a failed attempt for the same in January.

Philips inked an agreement to sell an 80.1% stake in Lumileds to NY-based private-equity firm, Apollo Global Management LLC. In January, the Dutch conglomerate had been forced to abandon a more lucrative deal to sell Lumileds to a Chinese consortium – GO Scale – after the influential Committee on Foreign Investment in the U.S. (CFIUS) blocked the same.

CFIUS’s rejection of the deal cost Philips about $1.3 billion, as the latter was about to receive around $2.8 billion from the stake sale to the Chinese group, which valued the lighting business at $3.3 billion.

In the new deal, Philips will get cash proceeds of about $1.5 billion for the stake, which is roughly 46% less than what was expected in the Chinese deal. This fresh deal, which values the whole unit at $2 billion, is slated to close in the first half of 2017 and is subject to regulatory approval.

Lumileds is the biggest supplier of headlamps to the auto industry and had reported sales of $2 billion in 2015. In fact, per information from the Philips website, this unit equips one out of every three cars in the world. Lumileds was being run as a standalone company, since 2015, as part of the company’s broader strategic restructuring.

Philips is still known as one of the world’s largest lighting manufacturers, a legacy it has built over a hundred years. This deal marks a major step in its attempts to divest itself of the lighting operations, as it focuses its resources on expanding health-care technology products. Back in May, it offloaded a minority stake in its general lighting business through an initial public offering, as part of its multi-year restructuring efforts.

Philips’ decision to sell off parts of its iconic lighting division is rooted in the low margins and limited growth prospects of the business, especially in comparison with its more lucrative and fast-growing health technology business, where it competes with Siemens AG and General Electric Company (GE - Free Report) . The lighting industry has seen a market shift toward smaller and more energy-efficient light-emitting diodes, or LEDs, which use semiconductor technology. This has intensified competition in the space, which has prompted Philips’ rival – Siemens – to also exit the lighting sector.

Philips’ healthcare business has been gaining rapid momentum, with rising demand for technology that enables hospitals to analyze clinical data and enable patients to monitor their health on smartphones.

The company is committed to restructuring its entire portfolio and exiting the lighting business completely so that it can channel its resources to the profitable health and consumer products businesses.

Although healthcare markets hold solid prospects in the long run, dismal performance in key end markets, including the U.S., Europe and China, in the short run has been restraining Philips’ growth momentum to some degree. Further, stiff competition from biggies like General Electric and Siemens also add to this Zacks Rank #3 (Hold) company’s woes.

These factors have led the company to underperform its peers in recent times. Year to date, Philips’ shares have recorded an average return of 17.3%, lower than the Zacks categorized Electronic Product Miscellaneous industry average of 23.6%. Moreover, analysts have become increasingly bearish on the stock in the past couple of months, with estimate revisions moving south. With one downward revisions compared with no upward revision in the past two months, the Zacks Consensus Estimate for fiscal 2016 earnings has declined from $1.63 to $1.59.

 

Stocks to Consider

Some better-ranked stocks in the same space are VOXX International Corporation (VOXX - Free Report) and Garmin Ltd. (GRMN - Free Report) .

VOXX International is engaged in marketing automobile sound, vehicle security, mobile video systems and consumer electronics products. The company has a decent earnings surprise history, having beaten estimates thrice in the trailing four quarters and boasts a whopping average positive surprise of 251.7%. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Garmin Ltd. designs, develops, manufactures, markets, and distributes a range of navigation, communication, and information devices, and carries a Zacks Rank #2 (Buy). The company has a striking earnings surprise history for the trailing four quarters, having beaten estimates in each of them, for a remarkable average of 35.7%.

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