Philips splits in two, making HealthTech its sole priority

Philips CEO Frans van Houten

Philips ($PHG) has been agonizing over how to repair its ailing healthcare business for some time. Now it's decided to split into two companies. One will be devoted to its Healthcare and Consumer Lifestyle businesses, while the other will spin off and be composed of the Lighting business.

This should give it ample room to pursue the next-generation technologies that it expects to result from the ongoing convergence of the professional healthcare and consumer end markets. That covers the gamut from innovation to support a healthy lifestyle and prevent disease to that involved in diagnosis, treatment and home care.

It's unclear as yet what the two companies will be named; the company said vaguely that both will "continue to leverage the Philips brand." The lighting business will be separated into another legal structure, and Philips is still considering alternatives for ownership structures that have direct access to the capital markets. More detailed information on the corporate structure of the spun-off lighting business won't be forthcoming until next year.

That makes HealthTech, the combination of the Healthcare and Consumer units, the sole focus for the remaining company. Philips said HealthTech would have had €15 billion in 2013 sales, while the Lighting business had €7 billion.

"Philips is uniquely positioned to help reshape and optimize population health management by leveraging big data and delivering care across the health continuum, from healthy living and prevention to diagnosis, minimally invasive treatment, recovery and home care," said Philips CEO Frans van Houten in a statement.

"The combination of our Healthcare and Consumer Lifestyle portfolios and the integration of the data from the connected products on Philips' cloud-based digital health platform illustrate our opportunity to capture growth in an increasingly connected world, where societies are looking for more effective and lower cost health solutions," he added.

Philips estimates that its HealthTech businesses already have leading positions in oral healthcare, healthcare informatics, ultrasound diagnostics, cardiac care and home healthcare for a total addressable market of more than €100 billion.

In recent months, Philips announced a couple of healthcare-focused partnerships including one with Salesforce.com to create a cloud-based platform for clinical information sharing and another with Accenture to introduce an app that allows immobilized patients  to control Philips products via a brainwave scan.

In early July, the chief of Philips Healthcare, Deborah DiSanzo, was ousted in a management shake-up and van Houten put the Healthcare unit under his own control. Healthcare was the worst performing business during the second quarter--down 4% to €2.4 billion--but also the largest in terms of revenues.

This corporate split will push Philips to sharpen and push forward its HealthTech efforts, which it seems to see as a potential engine of future growth for the company.

Each company will have its own dedicated management. The new operating structure is expected to result in additional savings of €100 million in 2015 and €200 million in 2016. Philips expects to incur €50 million in restructuring costs during 2014 to 2016.

The company guided for adjusted EBITA for the second half of 2014 that will be "slightly below" adjusted EBITA during the same period a year earlier. For Healthcare, reported EBITA during the second half is also expected to be lower than the same period a year earlier. Philips said it expects the continued impact of its Cleveland healthcare plant to be about €100 million during the second half; it had previously said that this problem would be resolved during the third quarter and benefit earnings during the second half.

For 2016, Philips is much more optimistic. It guided to comparable sales growth of 4% to 6%, an EBITA margin of 11% to 12% and a return on invested capital of more than 14%. Last quarter, sales were flat.

Investors endorsed the move, sending Philips up 3% in early trading on the NYSE after the announcement.

- here's the release and the webcast
- here's coverage from the WSJ (sub. req.), NYT (sub. req.), BBC and Reuters

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