Philips’s divestment in TV business and its implication:: Macquarie Research,

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MacqTech Express
Philips’s divestment in TV business
and its implication to the sector
Event
 Philips Electronics (PHIA NA, €21.08, OP, TP: €30, covered by Jean-Michel
Belanger) announced on 18 April that it is divesting its TV business into a JV
with TPV (903 HK, HK$4.97, N, TP: HK$5.10). TPV will own 70%, while
Philips (own 30%) will become a passive investor and license out its brand
name, mainly in Europe (ex China, US, India, Canada, Mexico and certain
S.America countries), for an initial period of 5 years and reserve the option to
sell its 30% stake to TPV for the same terms 6 years after completion.

Impact
 More on the economics. Besides the license, Philips will contribute to the JV
its innovation and development sites (Netherlands, Belgium and Singapore),
manufacturing sites (Hungary, Brazil and Argentina), sales organisations,
employees, certain patents and contracts. TPV will pay a deferred purchase
price equal to 70% of JV’s average consolidated EBIT in FY12 to the last
completed financial year prior to the date which Philips wishes to receive the
consideration multiplied by four (must be 3 years post completion).
 Impact on TPV lightly to be slightly positive. Leveraging on Philips’s brand
(~10% market share in Western Europe and ~11% in Eastern Europe), we
consider the deal slightly positive to TPV as we believe the JV could be
earnings accretive for TPV as early as in 2012 due to better economies of
scale in production and components procurement. The deal is expected to
close in 4Q11. The JV is required to pay a royalty to Philips from FY13
onwards (the higher of 2.2–3% of turnover or EUR50m).
 Deal likely to be slightly positive to AUO. Philips currently procures ~60–
70% of its panels from LG Display (034220 KS, Won36,100, OP, TP:
Won47,000) and ~30% from Sharp (6753 JP, ¥753, N, TP: ¥800). Post the
deal, it is likely that TPV will control future procurement decision, which could
provide upside to other suppliers such as AUO (2409 TW, NT$24.60, OP, TP:
NT$35) and CMI. Note AUO and TPV have a JV set up in March 2010 that
focuses on TV set ODM and LCD panel module production in Poland.
 Sharp – increasing risks of LCD assets write-down. Philips accounts for
~10% of Sharp's panel shipment. In addition to decline in Sharp's LCD panel
shipment due to eco point impact (~20% negative impact on shipment), Sharp
may see additional ~10% shipment decline from as early as 4QFY3/12. This
will likely make it more difficult for Sharp to raise its panel utilization, and may
be viewed as an increasing risk of Sharp writing-down LCD assets.
 LG Display – no material impact expected. Philips was a major shareholder
of LG Display in the past and has been one of the key TV panel clients.
Philips accounts for 10% of LGD's TV panel sales, or 5% of total sales. LGD
management remains confident that the deal will have no material impact on
LGD, built from its equally strong business relationship with TPV.
Outlook
 We believe the deal will be slightly positive to TPV and AUO, neutral for LGD
and slightly negative for Sharp.