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Royal Philips is headed for a breakup

September 23, 2014, 12:54 PM UTC
contract armin harris
Kyle Bean for Fortune

Royal Philips is spinning off its lighting unit to concentrate on its healthcare and consumer goods business as CEO Frans van Houten looks to refocus the 123-year-old company.

The healthcare and consumer goods business will become HealthTech with about $19 billion in sales, while its lighting unit will operate as a standalone company with about $9 billion annual revenue, the Dutch company announced Tuesday.

“I do appreciate the magnitude of the decision we are taking, but the time is right to take the next strategic step for Philips, as we continue on our transformation,” Van Houten said in a statement.

The restructuring is expected to save about $129 million in 2015 and another $257.7 million in 2016. Philips (PHG) will incur about $64.4 million additional annual restructuring charges starting this year until 2016.

Van Houten plans to tap into the growing market for healthcare tracking devices by merging the lifestyle and health businesses. The soon-to-be-combined units serve a market of nearly $129 billion across oral healthcare, informatics, ultrasound diagnostics, cardiac care and home healthcare.

The spinoff of its lighting business follows in the footsteps of rival Siemens, which spun off its lighting unit last year. The lighting industry has been undergoing rapid change as it shifts away from incandescent bulbs to more energy-efficient LEDs.

The industry is also shifting away from individual products to systems and services, and Philips believes its lighting unit will benefit from improved operational agility to respond to the quickly changing business.

Philips has not determined a final ownership structure for its lighting business and will explore several options, which could include an initial public offering.