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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Markets, as Lex readers may have heard once or twice before, hate uncertainty. Companies with hard-to-quantify liabilities become virtually uninvestable. While it is not hard to see why investors might eschew potentially bottomless pits, that does create opportunities for those with the conviction to take a longer-term view.
Look no further than the Agnelli family’s €2.6bn punt on Philips, which was spectacularly vindicated on Monday as the Dutch medical equipment manufacturer drew a line under its legal troubles.
When Italy’s billionaire Fiat scions took a 15 per cent stake in Philips last August, degrading foam in the group’s sleep apnoea machines had prompted product recalls and US lawsuits. Companies tend to underestimate and underprovision in these situations; the fear was that liabilities might snowball, in the unappealing mould of Bayer.
Now, however, the Agnellis look remarkably savvy. Monday’s $1.1bn settlement, which effectively caps personal injury and medical monitoring liabilities related to the breathing machines, has come more quickly than the market was expecting. It is also much less onerous. Analyst estimates of the liability hovered around the €2bn-€5bn mark, with a worst-case scenario of €10bn commonly touted.
A 29 per cent rise in Philips’ share price on Monday added €5.4bn to the group’s market value. That suggests that, not only has the legal overhang been removed, but a whole pool of investors — who previously would not touch Philips at any price — now considers the company investable.
They may also be vindicated. Even after Monday’s jump, Philips trades on 15 times 2025 earnings, on S&P Capital IQ estimates. Siemens Healthineers, a peer, is on a 33 per cent premium, at 20 times.
Philips will not close that discount overnight, of course. The group has long been plagued by execution concerns which go beyond its breathing machines. Just by way of example, the US Food and Drug Administration warned users to monitor Philips’ next generation DreamStation 2 for overheating last November.
But the group’s move from electronics to healthcare has placed it right in the middle of a secular growth trend. Ageing populations require better diagnostics and treatment. US hospitals are expected to increase spending by 7.5 per cent in the coming year, according to a survey commissioned by Barclays. Philips has an attractive product portfolio. There is room for its shares to rise further, now the group is in the process of convincing investors they can breathe easy at night.
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