Philips is to merge its lighting components businesses into a separate unit worth up to 2 billion euros ($2.7 billion) which may be listed - a major step in its ongoing strategy to refocus on healthcare and high-end lighting systems.
Under Chief Executive Frans van Houten, the Dutch company is reinventing itself after its TV, audio and video businesses struggled for years to compete with low-cost Asian rivals and prompted a spate of profit warnings at the firm. It has sold off its television business, cut more than 5,000 jobs and concentrated on growing its healthcare products.
Now Philips - which started out 120 years ago as a pioneer in electric lighting - wants to narrow its focus in that area too, to large, complex lighting systems rather than light-emitting diodes (LEDs), under pressure from a severe price war.
The market for LEDs is booming as the world switches from incandescent light bulbs, now banned in most places, to more efficient and durable lights. But a price war for LED bulbs is hurting profits, leaving Philips and German rival Osram - spun off from its parent company Siemens last July - scrambling to develop new technology and seek out new market segments.
By spinning off its Lumileds and its automotive lighting businesses - which had combined sales of 1.4 billion euros ($1.9 billion) last year - Philips said the unit would be better placed to compete for new business from outside customers who currently regard the Philips group as a competitor.
It also said it would look for outside equity or debt investors into the new business to help it expand its capacity, with an initial public offering one of the options.
"As a strong standalone company they will have increased flexibility to attract investments and customers to accelerate growth and to exploit scale," van Houten, who took the helm of the group in 2011, said in a telephone briefing.
Analysts said it was a smart move that would make Philips a more manageable and profitable business.
"It is definitely positive. It's a logical step in the strategy and will shore up their earnings quality," said Volker Stoll of Landesbank Baden-Wuerttemberg, adding that Philips appeared to be preparing the unit for an eventual sale.
"The margins will get lifted and the return on capital expenditure will also increase," he said. "It's good news as this issues was looming for quite some time."
Osram, which analysts say is weaker than Philips's new division in the field of LED lighting, has performed strongly since being spun off. Its shares have gained nearly 50 percent during a period when the German mid-cap index rose only 21 percent.
Shares in Philips were up 3.2 percent by 1222 GMT after the announcement.
The company did not give a valuation for the new business, but ING analyst Robin van de Broek estimated it could be worth about 2 billion euros, based on the fact that Osram trades at a multiple of 0.7 times price/share and Epistar, a Taiwanese rival which is more focused on LED manufacture, at 3.6 times price/share. The as yet unnamed new business will combine elements resembling each of the two companies.
The spun-off lighting business will make components such as bulbs, auto headlights and high-powered LED lamps. It will count BMW, Volkswagen (VOWG_p.DE) and the latter's Audi marque among its automotive clients.
Some analysts say LED car headlights, with their promise of higher premiums for the manufacturer, better fuel efficiency and more natural illumination of the road, are the next frontier for LED lighting technology.
Philips said the spin-off of the subsidiary, in which it could envisage holding a minority stake, should be completed by the first half of 2015, and cost Philips 30 million euros.
Philips's remaining lighting unit - which provides large lighting systems and services as well as light fittings and lamps for the professional and consumer markets - will be a major customer of the separate company.
The new business, which will be headed by Lumileds chief executive Pierre-Yves Lesaicherre, will also continue to collaborate with Philips lighting on research and development.
(Additional reporting by Anthony Deutsch and Harro Ten Wolde.; Editing by Sophie Walker)