By Scott Hillis

SAN FRANCISCO - Dutch electronics giant Philips Electronics NV said on Thursday it is selling an 80.1 percent stake in its microchip unit to several private equity firms for 3.4 billion euros ($4.35 billion).

Kohlberg Kravis Roberts & Co., Silver Lake Partners and AlpInvest will buy the stake in the unit, which Philips has been trying to unload as it shifts its focus from high-volume electronics to health and lifestyle-related products.

As a stand-alone company, the chip business will be able to find more customers and focus on the more stable automotive, industrial and consumer businesses, said Blake Fischer, an analyst with Stifel Nicholaus.

"One reason they wanted to spin off the semiconductor division was to allow them to get more opportunities than being a captive supplier to Philips would allow them to take," Fischer said.

The deal values the unit at 8.3 billion euros, which includes a 3.4 billion purchasing price for the stake, 4.0 billion in debt and about 900 million euros for the remaining Philips stake, Philips said.

Philips said it will receive cash proceeds after tax and transaction costs of 6.4 billion euros, which includes additional financing that the buyers are arranging as part of the deal.

With $3 billion in first-half sales, Philips ranked as the world's No. 11 chip supplier by sales at the end of June, according to market research firm IC Insights.

The company mostly makes chips for consumer electronics, cars and mobile telephones, and competes with Freescale Semiconductor Inc. of the United States and STMicroelectronics, Europe's largest chip company.

"As a stand-alone company, the semiconductors business will have every opportunity to realize its full potential," Philips Chief Executive Gerard Kleisterlee said in a statement.

Fischer said the new chip company would probably sell off under performing product lines, such as technologies for displays and flat-panel screens.

"They are looking to take some volatility out of the model," Fischer said.

Kohlberg Kravis Roberts & Co., one of the largest private equity firms, is currently raising what is expected to be a roughly $15 billion buyout fund.

Silver Lake Partners is the largest technology-focused private equity firm. The two firms teamed up with five other buyout firms in the $11.3 billion purchase of SunGard Data Systems in March 2005, at the time the second-largest leveraged buyout ever.

AlpInvest Partners is a European buyout firm and one of the investors in the 7.6 billion euro buyout of Dutch information provider VNU NV.

Last year, KKR and Silver Lake bought the chip unit of Agilent Technologies Inc. and relaunched it as Avago, one of the world's biggest privately held semiconductor companies.

The Philips deal also mirrors a similar move by U.S.-based Motorola Inc.'s spin-off of its chip unit, which became Freescale.

Fuelled by cheap debt, a steady economy, and huge cash piles from investors, private equity firms are enjoying their most profitable period in more than five years. Private equity mergers and acquisitions have gone from around 5 percent of global mergers and acquisitions to around 20 percent in that same period.

Buyout firms finance their deals with a small portion of their own cash and borrow the rest. After holding onto companies for, on average, three to five years, they sell them, keeping a slice of the profit and giving the rest back to their institutional investors.

(1 euro = $1.28)

(Additional reporting by Michael Flaherty in New York)