Sold: Equity group pays $10.63B for Philips chip unit

August 4, 2006 – After weeks of speculation, Royal Philips Electronics confirmed it has sold its semiconductor division to a consortium of equity firms. Kohlberg Kravis Roberts & Co. (KKR), Silver Lake Partners, and AlpInvest Partners NV will fork over a total of 8.3 billion euros (US $10.63 billion), outbidding two other equity groups for the No. 11 global chip provider.

Under terms of the deal, the equity firms will pay 3.4 billion euros ($4.36 billion) for an 80.1% stake n the chip unit, 0.9 billion euros ($1.15 billion) for Philips’ remaining stake, and 4.0 billion euros ($5.12 billion) for debt and other liabilities. Philips expects to receive cash proceeds of approximately 6.4 billion euros ($8.20 billion) from the sale, after taxes and costs.

Philips Semiconductors, which employs 37,000 workers worldwide, posted a profit of about $389 million in 2005 on sales of 4.6 billion euros ($5.89 billion). The unit’s 1H06 sales of about $2.99 billion put it a virtual tie with Freescale for the No. 10 spot in worldwide semiconductor sales, according to recent rankings from IC Insights Inc. The analyst firm projects that Philips will take over the 10th spot by year’s end, with stronger growth in 3Q and 4Q.

CEO Frans van Houten will be president and CEO of the new as-yet unnamed standalone company, and he will step down from Royal Philips’ board. He touted the unit’s strong R&D capabilities and IP portfolio, and said it will continue to focus on its four key markets: mobile/personal, home, automotive/identification, and multimarket semiconductors.

“As a stand-alone company, the semiconductors business will have every opportunity to realize its full potential and we are very pleased to have found strong partners that share our belief,” stated Gerard Kleisterlee, president and CEO of Royal Philips Electronics, adding that Philips will remain a business partner to the unit, ranked as Europe’s third-largest chipmaker behind Infineon Technologies AG and STMicroelectronics, with most of its business in Asia, and less than a quarter in Europe. Less than 10% of the business’ chips are made for internal use.

Recent reports had suggested the winning bidders were in a furious bidding war with two other equity groups — identified by media reports as Permira Advisors (London), Texas Pacific Group (Fort Worth, TX), and Blackstone Group (New York, NY); and Bain Capital Inc. (Boston), Apax Partners Worldwide LLC (London), and Francisco Partners Management LLC (Menlo Park, CA) — that had driven the semiconductor business’ pricetag above $10 billion, about a 30% premium over previous valuations.

In June, Philips indicated it would either sell the division or spin it off by year’s end with an IPO, to enable the business to grow to bigger scale in order to better compete, according to a report in The Wall Street Journal. Initial reports indicated the company originally tried to sell the unit outright, but apparently found no takers, or at least not at an agreed-upon price — analysts had estimated that the unit would be worth about 5-6 billion euros ($7.6 billion).


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