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Last updated: August 3, 2006 8:59 pm

Philips sells bulk of chip division

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Philips, the Dutch technology group, on Thursday banked €6.4bn ($8.2bn) in cash from selling the majority of its semiconductor division to a private equity consortium, distancing itself from the volatile chip sector.

The eagerly anticipated deal with Kohlberg Kravis Roberts and Silver Lake Partners of the US, and Dutch buy-out house Alpinvest, values the chip unit, the third largest in Europe, at €8.3bn.

Philips sold 80.1 per cent of the unit, keeping 19.9 per cent, a decision it said reflected confidence in the business, while underscoring a determination to scale back exposure to the sector. Gerard Kleisterlee, Philips chief executive, added that there was no lock-up period for the shares.

Frans van Houten will remain chief executive of the unit, a position he has held since November 2004. That decision by the private equity owners, endorsed Philips' view of management's success in reducing costs at the business, the Dutch company said.

The semiconductor division generated 2005 revenues of €4.6bn from €30.4bn for Philips in total. Three separate private equity teams had been in the running to buy the business.

When the plan to divest was originally announced, Philips expressed a preference for a trade buyer, but Mr Kleisterlee said on Thursday that management was convinced by the private equity consortium’s desire to invest in the business and that avoiding a merger would cut out the trauma associated with job cuts and factory closures.

The valuation of the unit, of €8.3bn, is 20-30 per cent above market estimates, according to Dresdner Kleinwort. It includes a €3.4bn purchasing price, €4bn of debt, and €0.9bn for Philips' remaining stake.

Among the buyers, KKR is writing the largest equity cheque, according to one person close to the deal. Although there may be some additional cost-cutting following the closing of the transaction, the buyers' plan is to see the unit expand, probably through acquisitions, as the semiconductor industry consolidates.

Shares in Philips traded strongly ahead of the expected announcement and on Friday, they were up 1.6 per cent at €26.12. Philips announced in June its intention to sell or float the majority of its chip unit. It laid the groundwork by setting in motion plans to legally separate the unit from its other four divisions, comprising consumer electronics, lighting, medical systems and domestic appliances.

Philips had said that process would be complete by the end of the current fiscal quarter, which runs until the end of September.

Philips' withdrawal from chipmaking underscores a strategy of outsourcing manufacturing and reducing exposure to volatile sectors. Facing pressure from investors to unlock value by dismantling its conglomerate structure, the Dutch company has shifted its focus to the more stable margins offered by the fast-growing healthcare sector.

The sale will spark speculation among analysts that Philips might be mulling a significant acquisition in the medical sector. It has limited its purchases to mostly modest deals, although it has spent about $3.5bn on 8 acquisitions in 12 months on healthcare-related transactions.

The decision to sell the chip division delivers on a key management goal for 2006. Gerard Kleisterlee, Philips chief executive, promised at the beginning of the year to "create value by pursuing strategic options" for the unit.

Mr van Houten said that he would outline further details about the semiconductor business’ strategy in Berlin at the start of September.

Morgan Stanley advised Philips, while Credit Suisse and Bank of America worked for the consortium.

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