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Philips exits shrinking home entertainment business

Philips Electronics  is selling its audio and video business to Japan’s Funai Electric Co in a deal that almost completes its exit from consumer electronics to focus on more profitable home appliances and healthcare areas.

For many years, the Dutch company was a familiar household name in Europe thanks to its high-quality goods such as television sets, cassettes and CD players.

But it has struggled to compete with lower-cost Asian manufacturers, including Samsung Electronics and LG Electronics, and has had to cut costs and sell assets over the last two years.

Philips had already hived off its ailing television business by setting up a joint venture with Hong Kong-based TPV  last year.

Now the sale of its audio and video operations for 150 million euros plus licence fees to Funai Electric takes the rest of the electronics out of the Philips name, apart from a small remote-control business.

With more consumers going online for music, films and games rather than buying CDs and DVDs, Philips decided to get out of home entertainment even though it was profitable last year, Chief Executive Frans van Houten said on Tuesday, adding that the business was shrinking and “margin dilutive”.

“This completes the repositioning away from consumer electronics,” van Houten told Reuters Insider.

In future, the consumer division will focus on appliances such as shavers and electric toothbrushes – two of the group’s most profitable products – as well as toasters, juicers and coffee makers. It sold 10 million shavers in China alone last year, van Houten said.

As well as making consumer goods, Philips is the world’s biggest lighting maker and a top-three maker of hospital equipment.

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Its shares rose 2 per cent to 22.37 euros, the highest level since April 2011 when van Houten became CEO with a brief to revive the company hit weak economic growth, fragile consumer spending and government budget cuts in several markets.

Van Houten said that of the hundreds of businesses and markets that have been under scrutiny since he took over, roughly one third still need to perform better, while two-thirds are doing well.

Fourth-quarter results released earlier on Tuesday showed that underlying profit improved significantly after job cuts, disposals and a focus on core businesses.

Philips reported three consecutive quarters of better-than-expected net profit in 2012, suggesting it had at last turned the corner.

According to equity analysis firm StarMine, Philips trades at a forward 12-month price/earnings ratio of 14.4, compared with 12.5 for Siemens  and 13.4 for General Electric.

But on a price-to-book ratio, it is slightly cheaper than its rivals, at 1.7, against 2.1 for Siemens and 1.8 for GE.

Analysts welcomed the Funai Electric deal as “an important divestment” that could fan hopes of further disposals in the consumer portfolio.

Van Houten dismissed talk of any major acquisitions, saying the firm was only interested in bolt-on deals at the moment.

Philips reported a fourth-quarter net loss of 355 million euros – widening from a year-ago loss of 160 million euros – as it cited previously flagged provisions and charges.

The group had already warned last month that it would take a provision of 509 million euros to cover a European Union fine for cartel practices in its television business, and that restructuring charges would be higher than previously estimated.

Adjusted quarterly earnings before interest, tax and amortisation (EBITA) was 875 million euros – up almost 50 per cent from a year ago and the best quarter in the past two years. Sales rose 3 per cent to 7.161 billion euros.

Analysts in a Reuters poll had forecast adjusted EBITA of 847 million euros, a net loss of 308 million euros and sales of 7.161 billion euros.

Sales and profits rose at the healthcare division, which sells home oxygen kits, hospital scanners and ultrasound systems, and at the consumer business.

Excluding restructuring and acquisition charges, EBITA for the lighting business – which has been hit by a slowdown in the construction market – also rose from a year ago.

Philips said it was on track to achieve its end-2013 targets of sales growth of between 4 and 6 per cent, a margin on EBITA of 10 to 12 per cent and a return on invested capital of 12 to 14 per cent.

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