Updated with new information on the proposed sale.
(Reuters) — Royal Philips‘s (NYSE:PHG) plan to shed its lighting businesses suffered a setback on Friday when a $3.3 billion deal to offload the components division to Asian buyers was blocked by the United States on security grounds.
The agreement to sell an 80% stake in the Lumileds division based in California ran into opposition from the Committee on Foreign Investment in the United States (CFIUS), Philips said in a statement.
The breakdown of the deal leaves the Dutch company under pressure as it tries to carry out several strategic operations at once. It has been trying to spin off its lighting and lighting components businesses since 2014 to focus on its core businesses of medical scanners and healthcare technology. Philips warned last year that the deal might be in jeopardy.
“I am very disappointed about this outcome as this was a very good deal for both Lumileds and the GO Scale Capital-led consortium,” Philips CEO Frans van Houten said.
Philips said it was not permitted to disclose the nature of the concerns raised by the U.S. committee, which vets deals for any national security issues.
The frustrated buyer, GO Scale Capital, is made up of GSR Ventures, Oak Investment Partners, Asia Pacific Resource Development and Nanchang Industrial Group.
The exact reason why the United States has blocked a Dutch company from selling a lighting division to Asian investors on national security grounds is not clear.
The involvement of Chinese firms in the consortium – and the fact that LEDs (light-emitting diodes) are semiconductors, an industry the U.S. considers part of its critical infrastructure – may have played a role.
ALTERNATIVE DEALS
Lumileds makes lighting components used mostly in cars but also LEDs used for backlighting in consumer electronics such as smartphones and televisions. The technology used by Lumileds is considered relatively mature and Philips was surprised by the U.S. committee’s initial opposition in October.
The final rejection came “despite the extensive efforts of Philips and GO Scale Capital to mitigate” the committee’s concerns, Philips said.
In a separate statement, GO Scale Capital said it tried “to make the case for the Lumileds transaction under principles of openness and fairness, unfortunately all such efforts fell short of addressing unexplained government concerns.”
GO Scale Capital chairman Sonny Wu said he was undeterred and would now seek other large LED industry acquisitions to combine with China’s manufacturing base.
“China will inevitably become the leader of the global LED industry because of its industrial ecosystem and competitive advantages in scale and cost,” he said.
Philips shares closed 0.1 percent lower at 22.70 euros in Amsterdam.
Two CFIUS experts in Washington, hired by companies to shepherd deals through the process, said the deal may have troubled the U.S. government because of the prospect of a Chinese company acquiring advanced technologies to make the LED lights. One pointed to Lumiled’s expertise with a method for developing semiconductor materials for LED lights called a metal-organic chemical vapor deposition system.
“CFIUS has been looking very closely at the semiconductor space,” said one expert, who noted that it was fairly unusual for CFIUS to stop a deal.
LIGHTING SALE
Philips spokesman Steve Klink said the company was reviving talks with alternative buyers for the division, which had sales of $2 billion in 2015.
Morningstar analyst Jeffrey Vonk said in a note Philips was likely to have to accept a price closer to 2 billion euros ($2.2 billion) for Lumileds, given current market conditions.
The company will press ahead with separate plans to spin off its main lighting division by June.
Earlier this month, Reuters reported the company was soliciting bids for the main Philips Lighting business at a price of roughly 5 billion euros.
Philips Lighting’s carve-out as an independent company within the overall group is due to be completed by Feb. 1, with a decision to be taken shortly afterwards on whether to sell it, or go for a stock market listing.
($1 = 0.9246 euros)
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