Philips Ends ‘Proud History,’ Transferring TV Business to TPV

Former Philips Consumer Electronics executive Frans Van Houten used his first quarterly earnings call Monday since taking the helm as Philips CEO on April 1 to announce the company’s departure from its beleaguered TV business. “TV had become a value detractor for Philips,” Van Houten said, so the company had little choice but to transfer the business to China’s TPV Technology under a joint-venture deal.

In recent weeks, Philips announced that its TV operating loss for Q1 would be roughly double that of a year earlier amid bloated inventories and severe pricing pressure (CED March 28 p5). But until Monday, Philips repeatedly had declined comment on what options it was considering for the TV business, including pursuing a licensing strategy that has landed agreements with Funai for North America, Videotron for India and TPV for China. Under the new agreement billed as the start of a “long-term strategic partnership,” Philips will own 30 percent, TPV the rest, of a joint venture that will make and market Philips-brand TVs in all territories except those where Philips has had existing license arrangements, including the U.S., Canada and Mexico. The deal with Funai for Philips-brand CE goods in North America expires in 2012 and it’s up to Philips to decide whether to renew it, Shane Tyau, TPV’s corporate finance director, told us by email.

"We are all aware that TV has a proud history at Philips, since 1928,” Van Houten told analysts. “In recent years, however, TV has not performed well, amidst a radically changing industry dynamic.” The partnership with TPV “is good news for our trade partners and consumers, as continuity of Philips TV in the market is assured,” he said. “It will help create the focus, scale, and business model to enable the return to profitability in the very dynamic TV industry. The joint venture will leverage Philips’ strengths, such as the brand, our brand, innovation power, and trade and market access, with the additional scale and manufacturing strengths of TPV."

Under the five-year deal, Philips will grant the joint venture the right to use the Philips brand for TVs, “under certain strict quality and customer care standards,” the companies said. In return, Philips will receive revenue-based royalty payments, they said. The joint venture will pay no royalties in 2012 but will submit payments annually of 2.2 percent of sales beginning in 2013, or a minimum of 50 million euros, they said. Meeting “certain performance criteria” that weren’t specified would raise the royalty rate “with a variable component” to a maximum of 3 percent of sales, they said. The Philips TV business generated about 3 billion euros in sales last year, Philips said. The deal is expected to close before the end of 2011, the companies said.

At Philips, “we see ourselves, post-TV, as a strong diversified industrial group,” Van Houten said in Q-and-A. “We have about 75 percent of our business in business to business and capital goods. Philips is a conglomerate with quite a number of individual businesses that serve 100-plus countries.” Philips plans to “leverage our strong brand presence in growth markets,” Van Houten said. “In this context, we aim to develop China into a home market by moving into this important market more business-creation units, inclusive of innovation resources and business management authority, to enable speed of decision making. We expect these to benefit China, but also the export opportunities from China into other markets in the world. Overall, as I'm sure you can discern from my words, I see speed of action as a competitive weapon, and I am determined to increase the clock speed and market effectiveness of Philips.”