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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.
Markets, as Lex readers could have heard a few times earlier than, hate uncertainty. Companies with hard-to-quantify liabilities turn out to be nearly uninvestable. While it’s not exhausting to see why buyers may eschew probably bottomless pits, that does create alternatives for these with the conviction to take a longer-term view.
Look no additional than the Agnelli household’s €2.6bn punt on Philips, which was spectacularly vindicated on Monday because the Dutch medical tools producer drew a line underneath its authorized troubles.
When Italy’s billionaire Fiat scions took a 15 per cent stake in Philips final August, degrading foam within the group’s sleep apnoea machines had prompted product recollects and US lawsuits. Companies are likely to underestimate and underprovision in these conditions; the concern was that liabilities may snowball, within the unappealing mould of Bayer.
Now, nevertheless, the Agnellis look remarkably savvy. Monday’s $1.1bn settlement, which successfully caps private damage and medical monitoring liabilities associated to the respiration machines, has come extra rapidly than the market was anticipating. It can also be a lot much less onerous. Analyst estimates of the legal responsibility hovered across the €2bn-€5bn mark, with a worst-case situation of €10bn generally touted.
A close to 40 per cent rise in Philips’ share worth on Monday added €6.3bn to the group’s market worth. That means that, not solely has the authorized overhang been eliminated, however a complete pool of buyers — who beforehand wouldn’t contact Philips at any worth — now considers the corporate investable.
They may additionally be vindicated. Even after Monday’s soar, Philips trades on 15 instances 2025 earnings, on S&P Capital IQ estimates. Siemens Healthineers, a peer, is on a 33 per cent premium, at 20 instances.
Philips is not going to shut that low cost in a single day, in fact. The group has lengthy been affected by execution considerations which transcend its respiration machines. Just by means of instance, the US Food and Drug Administration warned customers to watch Philips’ subsequent technology DreamStation 2 for overheating final November.
But the group’s transfer from electronics to healthcare has positioned it proper in the midst of a secular progress pattern. Ageing populations require higher diagnostics and remedy. US hospitals are anticipated to extend spending by 7.5 per cent within the coming yr, in line with a survey commissioned by Barclays. Philips has a lovely product portfolio. There is room for its shares to rise additional, now the group is within the technique of convincing buyers they will breathe simple at night time.