Philips sells most of chip unit to equity firms

By : |August 4, 2006 0

By Scott Hillis

SAN FRANCISCO – Dutch electronics giant Philips
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

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

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
.’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)

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