ANALYSIS-Philips<PHG.AS> to call handsets outcome this week
<<Its GSM patents could be sold >>
AMSTERDAM, June 25 (Reuters) - Philips Electronics NV will break its silence this week on the future of its mobile phone business and analysts believe it has little choice but to close the PCC unit.
Philips, Europe's largest maker of consumer electronics and lighting and number three in semiconductors, has promised to spell out the future of PCC (Philips Consumer Communications) by the end of the June. It has less than a week left.
The company is due to brief analysts on its consumer electronics division -- of which PCC is a part -- on Wednesday, so its announcement is expected that morning or on Tuesday.
Analysts believe it will have failed to find a buyer or joint venture partner and will finally throw in the towel after a four year flirtation with handsets. It may also detail cutbacks to its loss-making television set-top box business.
If it does so, it would be the first European company in the fragile mobile market to close a handset unit, although a number of rivals have scaled back their involvement.
Within the last month, France's Alcatel <CGEP.PA> decided to outsource its entire handset production. Sweden's Ericsson <LMEb.ST> did the same last year.
PCC, born as a 60-40 joint venture with Lucent Technologies <LU.N> in 1997, has drained about 850 million euros ($731 million) from its parent so far.
Only in one year, the mobile boom of 2000, did it report an operating profit, and then a modest one million euros as capacity constraints left it far short of its sales target.
Since then the market has toughened and competition intensified. Philips' business, with less than 10 percent of the GSM market, is not economic.
Some analysts said Philips' production facilities were old-fashioned, while models since the Genie had not had the state-of-the-art feel that fashion-conscious consumers demand.
Murmurings of a pull-out began earlier this year when new President Gerard Kleisterlee said selling the unit was an option after limited success in finding a joint venture partner.
The arrival of a new boss at PCC itself in May -- Axel Rueckert -- suggested Philips had settled on closure.
If the unit is closed, it could lift Philips' shares, although some in the market believe a number of long positions have already built up -- implying a rally may not be sustained.
Philips shares have fallen 22 percent in the year-to-date. However, that represents a 31 percent outperformance relative to the Dow Jones Stoxx European technology index <.SX8P>. At the close on Monday, the shares were up 0.50 percent at 30.35 euros.
PCC OFF-CUTS
A number of analysts believe Philips will have to settle for a simple exit, but some suggest it may have interested trophy hunters in a few of the pieces.
Its GSM patents could be sold, while its reasonable showing in China -- where Philips has an eight percent market share -- mean it might have found a buyer for its Singapore plant.
There are even rumours that Philips has sealed some form of alliance with a Chinese telecoms equipment maker.
Closure would cost Philips around 300-350 million euros ($259-302 million), analysts say, in addition to the 350 million euros already announced to cover the up to 7,000 job cuts at the Philips group.
Philips has already spent 74 million euros in the first quarter to cover inventory write-downs. But the ultimate cost could be higher.
Shutting its European base at Le Mans, France, could incur the wrath of unions and public opinion in France -- one of Philips' key markets.
It would also be a blow for its semiconductor and components divisions, which would instantly lose a key customer.
"Also if you have no handset business, it's more difficult to design chips and components for mobile phones," said Didier Scemama, analyst at ABN AMRO.
SET-TOP SETBACKS
While a handset pull-out would grab headlines, Philips also has to wrestle with other problem areas, chief among them its digital networks unit, which makes set-top boxes for interactive television.
The Dutch group is expected to scale back its ambitions and contain its exposure in the U.S. market. The unit, which suffered a 40 million euro loss in the first three months, has been in the red every quarter for the past two years. Philips has not given figures for previous periods.
"It's continually referred to as promising, but will it ever really pick up?" said Steven Vrolijk, ING Barings.
Philips, the world's third largest set-top box maker, has found the going tough behind Motorola <MOT.N> and main European rival Thomson Multimedia <TMM.PA>.
Analysts say Philips' problem is that it has sought a presence in all set-top markets and has two competing in-house chip and software platforms.
"Philips is trying to be in digital terrestrial, digital cable and digital satellite. Thomson Multimedia are essentially a satellite player and they don't supply anything into cable," said ABN AMRO's Scemama.
MAINSTREAM PROBLEMS
A further concern is the mainstream hi-fi, video and television business, which reported a near fivefold increase in losses in the first quarter despite a slight rise in sales.
Philips is competing in a cut-throat market in which its operating margins have barely passed four percent. Solid in Europe, Philips needs to grow its U.S. presence to convert acceptable returns into strong profits.
Conditions there are currently poor, but analysts say this should not deflect Philips from backing up a strong advertising campaign with a concerted marketing push.
"The mainstream is arguably the most interesting area they need to address. The have to improve their profitability and that means breaking further into the U.S. market," said Wouter de Ridder, analyst at merchant bank Kempen & Co.
12:09 06-25-01 |
