Philips’ sale of its consumer electronic business to Funai Electric on Tuesday is a prime example of EMEA capital goods companies shedding units to refocus their portfolio on higher-return businesses, Fitch Ratings says. Disposals like this are often in segments in competitive end-markets, underperforming assets or units with large investment needs. They represent the next step beyond the cost-cutting measures that surged in the industry after the 2009 recession.
In Philips’ case the sale has reduced the company’s exposure to a competitive market that requires continuous investment to keep up with technological changes, while offering only narrow margins and few synergies with the rest of its business. Philips had already significantly reduced its exposure to consumer electronics to less than 8% of total group revenue. We view the strategy as positive for its business profile as it shifts the focus to more stable and higher-margin businesses, such as healthcare.
“We expect more M&A in 2013, as buyers seem increasingly willing to do large deals. But these transactions are unlikely to lead to a broad improvement in financial profiles, as disposals often follow or are concurrent with large share buyback programmes or substantial investments to tap new, profitable markets, increase emerging markets presence and strengthen core partnerships,” Fitch in a statement said.
For example, it added, Volvo’s SEK6.9bn sale of its aircraft engine unit Volvo Aero to GKN removed a non-core business from the portfolio and provided cash to invest around SEK5.6billion in a joint venture with Chinese truck manufacturer Dongfeng, announced at the weekend, and increase its stake in Deutz, a strategically important supplier, to 25%.
Similarly, Siemens is overhauling its group, selling less profitable, non-core assets and spinning off its lighting unit, OSRAM, in a listing designed to raise the large funding required for a transition to LED technology. At the same time, the group spent GBP1.7billion on its acquisition of Invensys Rail, which geographically complemented its existing rail business, and another EUR2.9billion to fund its equity-to-debt swap.
The deals are likely to continue in 2013, with GEA Group Aktiengesellschaft among the companies that could sell off underperforming assets. If the process does result in the disposal of some of the group’s about 30 business units, we would expect improving margins from 2014.