Healthcare, wellness drive Philips growth as it works to shed lighting, maintain cautious M&A strategy

Frans van Houten

Royal Philips ($PHG) seems to be gaining some traction with its ongoing restructure to focus on HealthTech, a combination of healthcare and consumer-oriented products. But it's hit a regulatory stumbling block with the $3.3 billion sale of 80% of its combined Lumileds and automotive lighting businesses, which it has already separated out as discontinued operations on its balance sheet. Philips also hasn't yet sorted out its strategic plans for its remaining Lighting business, which it said it will separate out during the first half of 2016.

As these anticipated divestitures keep unfolding, Philips said it would continue to proceed with caution in its M&A activity. The cash from exiting lighting almost entirely is expected to help underwrite the pivot of the conglomerate toward HealthTech.

"Basically, it does not change our M&A strategy. In any case, we were cautious in our M&A approach and not in a hurry," Philips CEO Frans van Houten said on an Oct. 26 earnings call. "We're making great progress in the integration of Volcano, where we are fully on schedule with our assumptions with regard to the benefits and integration. We have quite a lot on our plate with the separation of Philips Lighting. And therefore, we will not do anything unexpected on the M&A front."

The sale of the Lumileds and automotive lighting businesses to a consortium to a consortium led by Go Scale Capital, an Amsterdam-based fund backed by GSR Ventures and Oak Investment Partners, has been met with "unforeseen concerns" from the Committee on Foreign Investments in the United States (CFIUS). But van Houten said that he expects the deal ultimately to go through.

"The CFIUS committee looks at all foreign investments in the United States. Together with Go Scale Capital we have applied for that approval," he said on the call. "As you will appreciate, the CFIUS process is confidential and we are not at liberty to give you a peak insight of the dossier, so let me not do that. We continue to work together on this towards a closing and that's what our focus is on whereas we do flag some uncertainty. The main news here is also one of delay."

Van Houten also reaffirmed the company's plans for the remainder of its Lighting business, which is slated to be completely separated out during the first half of 2016. Philips continues to consider "all strategic options for Philips Lighting, including an initial public offering and a private sale." Related costs are expected to be €200 million ($220 million) to €300 million ($331 million) in both 2015 and again in 2016.

Last quarter, Philips saw sales climb 2% to €5.8 billion ($6.4 billion) over the same period a year ago. That was driven by healthcare sales, which had an uptick of 3% to €2.6 billion ($2.9 billion), and consumer lifestyle products, which gained 6% to €1.2 billion ($1.3 billion) including double-digit increases in health, wellness and personal care products.

- here is the earnings announcement
- and here is the webcast