Philips: A long goodbye to lighting?

Connect the dots: Last week, Chinese LED wunderkind Opple Lighting said that it will roll into India where it will mercilessly underprice established brands like Philips and Havells. This week, Philips – the world's largest lighting company – threw in a sort of towel as it said it will cast off its venerable lighting division into 'independence', which was likely a euphemism for an eventual spin-off or something similar.

Not that the latest stop on Opple's indefatigable international expansion led directly to Philips' intentions to 'consider various options for alternative ownership structures' for lighting.

But Opple serves as a symbol of everything that prompted Philips CEO Frans van Houten to decide that he's had enough rough-and-tumble in the brave new world of digital lighting.

Or at least enough of it to cast off lighting into a group that Philips won't outright own and that therefore might somehow behave more nimbly in an industry increasingly characterised by fleet footed types like Opple, by relative newcomers like Cree, TCP and Acuity, and that is now requiring Internet-like agility as lighting starts to underpin the world's smart cities and connectivity of things.

'I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step for Philips, as we continue on our transformation,' said van Houten, as we reported yesterday. 'Giving independence to our Lighting solutions business will better enable it to expand its global leadership position and venture into adjacent market opportunities.'

IN OTHER WORDS

To paraphrase van Houten: Lighting has been good to the Dutch giant over most of its 123 years – Philips started life as a bulb maker – but not so much lately. While Philips has impressively charged into the brave new world of LEDs (light emitting diodes) and all the digital controls and services that go along with it, it has continued to haul around the albatross of conventional lighting.

Thus Philips' lighting sales slumped by 4 percent through the first half of this year, to €3.83 billion from €4 billion in 2013's first half.

The decline would have been much worse had LED sales not come on. In the second quarter ended June 30, LEDs accounted for 36 percent of lighting sales, up from 25 percent in the same quarter a year earlier.

But selling LEDs is one thing; making money from them is another. Although Philips has deftly shifted toward a modern business model of selling lighting services, it hasn't necessarily cracked the formula for profiting from them. 

All the while, it has had to lower prices on LED bulbs faster than it would like – LEDs are far more costly to make than good old incandescents – in order to compete against the new LED-only newcomers and against certain low-quality brands that are not encumbered with the same sort of legacy costs as at Philips. From January through June 30, lighting income declined by roughly 3 percent, to €219 million, from €225 million in the first half of 2013.

None of this helped Philips avoid making its little noted profits warning yesterday, when, amid the blinding declaration of lighting independence, it cautioned that 'the second half of 2014 is expected to be slightly below the adjusted EBITA in the same period last year.'

Therefore, van Houten's quest for an 'alternative ownership structure' for the lighting solutions business.

But what, exactly, did he mean by it, other than, as Philips said in a press release, he hopes to broaden 'direct access to capital markets'?

OUT THE DOOR

The company said it will provide more information in 2015.

Is Philips looking to sell the operations lock stock and barrel in order to concentrate on its newly declared core of healthcare as well as consumer products like coffee makers and shavers? It was already looking for a buyer for the LED chip and automotive portions of its €7 billion lighting group -- is the whole shebang next? Will Philips shed lighting, as rival Siemens did with its former Osram group in 2013, and as GE is rumoured to be doing, which GE denies (anyone for a combined GE/Philips?).

After all, Philips has in recent years hived off other conventional businesses like televisions, stereos and DVDs, mobile phones, broadcasting, and semiconductors. Is lighting next? 

David Vos, a London-based analyst with Barclays, says that lighting is indeed heading for a door at Philips, although not necessarily in an outright sale.

'For Philips it is a logical next step that has been in the making for twenty years or so,' says Vos, referring to the many other operations that Philips has jettisoned. 'This is the last step in that journey.'

Vos sees two possible scenarios: Philips will either spin off lighting by giving current Philips shareholders ownership that they are then free to sell (as Siemens essentially did with Osram), or will float the division in a new lighting company IPO.

Either way, Philips itself would not control the entity, even though the plan is for the newly owned lighting group to retain the Philips name.

Vos sees little chance that Philips will sell the lighting business as a whole, because as a €7 billion entity few buyers have the money, and few would want to acquire Philips' legacy burdens.

NETTING POSSIBILITIES

So who might come in as part of what Philips calls 'alternative ownership?' With lighting heading into the world of connectivity and Internet controls, might someone from that habitat show an interest in investing? Google? Apple? Facebook?

'That is a very interesting proposition and one that companies like that could entertain,' noted one analyst who attended a day of meetings with Philips yesterday and who asked to remain anonymous. 'Apple and Google are interested in becoming part of the automated home. Like someone said yesterday, “lighting is the only appliance in your house that you use every day always.” Old bulbs are a dumb piece of kit waiting to be smartened up.'

Google's acquisition of 'smart thermostat' maker Nest in February provides a precedent. 

And Apple already has a relationship with Philips, selling Philips' Hue LED bulbs and wireless controls. Hue bulbs turn on and off and change colours and brigthness in response to commands from gadgets like smartphones. Apple offers Hue bulbs and lighting strips that don't even require a tradtional light socket.

But as the anlayst noted, companies like Apple and Google might want to only go so far in investing in a company that is also still heavily vested in the declining world of conventional lighting.

'It gets a bit messy,' the analyst said.

Which is apparently how van Houten feels about the lighting business in general, even though he has already cleaned it up considerably as part of an ongoing corporate cost cutting programme. Good luck to any 'alternative owners' in their effort at scrubbing it further.

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Photo is from Philips via Flickr

 

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