Philips' conglomerate discount may linger in spite of a historic move to split the company in two. The euro 22-billion Dutch electronics group is undergoing its most radical transformation, spinning off its troubled lighting unit while merging its health care and consumer operations. But separating is not fixing. And it will take time for Philips to realise synergies between medical devices and everyday appliances.
Chief Executive Frans van Houten's latest restructuring is at least a nod to reality over sentiment. Though Philips began life in 1891 as a light-bulb maker in Eindhoven, the emergence of highly efficient LED technology has put pressure on the industry's economics. Light bulbs need changing less often. Rising sales of pricier LEDs have failed to compensate for the associated revenue decline. After an initial surge after its listing by parent Siemens last summer, shares in rival Osram have fallen 22 per cent this year.
Van Houten had tinkered with lighting in June, hiving off the components business, 15 per cent of lighting in revenue terms, into a separate unit. The latest split could see a stock-market listing for the larger "lighting solutions" operations, which represented a third of Philips' total 2013 revenue. Or it could be sold.
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Sprucing Philips' core business, renamed HealthTech, will be similarly challenging. There may be ways of getting, say, electronic toothbrushes to talk to dentists' PCs - to the benefit of Philips' bottom line. But revenue growth in health care has been tepid. Worse, the closure of a US medical imaging facility keeps adding to restructuring charges. Van Houten reckons the break-up will save euro 150 million by 2016. Demergers normally lead to increased expense due to duplicated overheads, which suggests the cuts could have been done anyway. Philips' shares trade on a forward price-earnings ratio of 14, an eight per cent discount to peers. Delivery on efficiencies may narrow the gap. But a break-up won't magic away Philips' problems.
