Electronics giant Koninklijke Philips N.V 's PHG plans to divest its LED business, Lumileds, to GO Scale Capital were scrapped late last week after failing to receive approval from the influential Committee on Foreign Investment in the U.S. (CFIUS).
The announcement comes close on the heels of another scrapped European deal where the U.S. Justice Department raised concerns about competition -General Electric Company's GE $3.3 billion proposed sale of its appliance business to Sweden-based Electrolux.
The Scrapped Deal
Last Friday, Philips announced the termination of the proposed $2.8 billion sale of the majority stake of its lighting components and automotive-lighting unit to a consortium led by investment fund, GO Scale Capital.
Philips had inked an agreement with GO Scale Capital to sell 80.1% interest in the Lumileds business as part of its strategy to gradually exit the lighting business. However, CFIUS - an inter-agency group led by the Treasury Department that scrutinizes international transactions for their impact on national security - expressed "certain unforeseen concerns" about the deal.
CFIUS has traditionally been sensitive about the control of high-tech companies in the U.S. passing into Chinese hands. Of late, however, the agency has become vigilant even about the transfer of technology. Some experts believe that the prospect of a Chinese company acquiring advanced technologies to make the LED lights might have made the U.S. government uneasy.
Lumileds is the biggest supplier of headlamps to the auto industry. In fact, per information from Philips' website, this unit equips one out of every three cars in the world. Thus, the regulator's actions may have been directed toward blocking China's progress on the auto production value chain.
The deal could not obtain regulatory approval despite extensive efforts by Philips and GO Scale Capital to alleviate the concerns raised by CFIUS.
The Road Ahead for Lumileds
The collapse of the deal leaves the Amsterdam-based company under considerable strain as it has been trying to execute several strategic operations at once. Philips is presently preparing to divest its residual lighting business through a listing or sale.
The company intends to engage into talks with other interested parties and continue to explore strategic options for Lumileds. However, it is likely that Philips may now have to sell Lumileds for a markedly lower price as the unit's earnings have recently come under pressure. Also, the Treasury's actions can only serve to depress the bids further by narrowing the field of potential bidders.
Selling the unit is a critical step for Philips in its plan to exit its lighting activities. The company has been attempting to get out of its relatively low-margin lighting business and focus its resources on the more profitable health and consumer products businesses.
Philips currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the same space are GigOptix, Inc. GIG and Mistras Group, Inc. MG . Both these stocks sport a Zacks Rank #1 (Strong Buy).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
