The sale of Philips lighting business to a predominantly Chinese private equity fund, has been blocked by the US, on national security grounds. Despite the extensive efforts of Philips and GO Scale Capital to mitigate the concerns of the Committee on Foreign Investment in the United States (CFIUS), regulatory clearance has not been granted for this transaction.
"I am very disappointed about this outcome as this was a very good deal for both Lumileds and the GO Scale Capital-led consortium. This outcome does not, however, impact the fundamentals of the Lumileds business", said Frans van Houten, CEO of Royal Philips. "Lumileds is a highly successful supplier of lighting components to the general illumination, automotive and consumer electronics markets with a strong customer base. We will now engage with other parties that have expressed an interest in exploring strategic options for Lumileds to pursue more growth and scale".
Van Houten also conceded that although Philips still intends to spin-off the business, it was likely to attract a lower price than the $3bn offered in the failed deal. “It will take some time — it may take us into the second half of 2016 — and there is some concern that the value realisation in a new deal may be somewhat lower than the original deal”.
Philips Lighting recently struck partnerships with Apple and Cisco in a bid to bring high-margin programmable LED lighting to homes and offices. “Lighting is undergoing a rapid transformation as Light Emitting Diodes (LED) become the number one source of light in buildings” which is a quote taken from our lighting controls report, which shows the huge potential for lighting in IoT enabled Smart Buildings.
It seems the U.S. is becoming increasingly paranoid of Chinese tech companies. Taking into consideration that Royal Philips NV, is actually a Dutch-owned electronics company, Reuters reported “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”. While Bloomberg suggested that, “the sale stalled over the transfer of semiconductor technology involved in making LEDs”, and despite the lengthy negotiations, the deal “fell short of addressing unexplained government concerns”.
Chinese firms and funds have been proactively buying up global technology assets for some time now, breaking investment records in recent years. A key trend in this M&A activity has been technology relating to the automotive industry, highlighting the lack of major car brands in the world’s largest vehicle market. Automotive acquisitions by Chinese investors reached record levels in 2015, with the $7.1 billion paid by ChemChina's for Italian tire-maker Pirelli among the country's biggest deals of the year.
Lumileds, is the single largest supplier of headlamps to the auto industry, with sales of approximately $2 billion in 2014 and “equipping one out of every three cars in the world”, according to the company's website. By preventing the deal, the US restricts China’s progress in further developing its auto-industry.
This is not the first time the US foreign-investment review committee has exerted pressure to block such a deal. A $23 billion proposal for chipmaker Micron Technology fell down after suggestions that the proposal would run into opposition from the committee. The fact that the US can, and will, effectively block the sale of a Dutch lighting company to an Asian investment fund demonstrates the extent of China's automotive challenge.
China has been quite vocal about plans to move into new automotive areas such as driverless cars, a new sector where their lack of history might not be such as obstacle. Baidu, China's largest Internet search engine, has teamed up with electric car maker BYD, in order to develop autonomous cars. The firms hope they will be well positioned to dominate the potentially huge Chinese market and contend internationally.
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After the deal, GO Scale Capital Chairman Mr. Sonny Wu insists the firm “has been and continues to be a fiercely committed advocate for clean, renewable energy and technology development globally, in sectors such as LED lighting, electric vehicles and energy storage". "GO Scale Capital's vision of building world-class technology industries in China combines advanced technology with the powerful market engines in China, and focuses on the industrialization of mature technologies to serve vast demand in high-growth, emerging industries in China and around the world", Wu continued.
However, despite persistent attempts by GO Scale Capital and Royal Philips to make the case for the Lumileds transaction under principles of openness and fairness, all such efforts fell short of addressing “unexplained government concerns”. During the process, GO Scale Capital maintains it was very transparent about its bona fide commercial and market-oriented interests to invest in technologies and apply them towards global sustainable development to generate attractive investment returns.
"Moving forward, we are not deterred from our goal of building the world's leading LED lighting company; and China will inevitably become the leader of the global LED industry because of its industrial ecosystem and competitive advantages in scale and cost," said Mr. Wu. "We will continue to seek opportunities through early stage investments in technology, mergers and acquisitions, as well as talent and disruptive ideas that can change the world for a better and more sustainable future”.