Biotech Values

[DewDiligence]

Hurdles Remain in Novartis’ Push for Alcon

[From a strictly legal standpoint, NVS can force the Alcon deal to close on its own terms, but will the cost to NVS’s corporate reputation be worth it? Neither side has budged an inch since NVS exercised its option to acquire the remainder of Nestlé’s stake in Jan 2010 and simultaneously offered to buy out Alcon’s minority shareholders on less favorable terms (#msg-45072999).]

http://online.wsj.com/article/SB10001424052748703571704575340973876155644.html

›JULY 1, 2010, 1:44 P.M. ET
By GORAN MIJUK And JON KAMP

ZURICH—Novartis AG expects to become a majority owner of eye-care firm Alcon Inc. in the coming months, but its path to full ownership remains fraught with uncertainty and the threat of escalating costs.

The Swiss drug giant already owns a quarter of Alcon and, pending regulatory approval, will acquire another 52% from Nestlé SA later this year. Novartis then aims to buy the remaining portion of Alcon that trades publicly, but without overpaying or getting bogged down in a legal fight with Alcon's directors or shareholders.

The stakes are high for Novartis, which needs to own all of Alcon to realize maximum deal-related savings with minimum headaches. But the company's effort to wrap up the deal included an offer to shareholders that three independent Alcon directors called "grossly inadequate."

Those directors continue to dispute the drug maker's contention that Swiss merger law—Alcon is also incorporated there—means it can force a deal on its terms.

The two parties exchanged a fresh salvo late Wednesday after Alcon announced a required mid-August shareholders meeting to consider five Novartis candidates for Alcon's board to replace Nestlé's members.

Alcon's independent directors said those board members have to abstain from voting on the merger proposal.

Novartis, in turn, said it "maintains that a director is not considered conflicted solely as a result of being nominated by a majority shareholder." The drug maker also said it expects to buy Nestlé's Alcon stake by late this quarter or next.

Concerns about a difficult takeover have simmered since Novartis launched the complicated transaction in 2008, when it bought its initial Alcon stake from Nestlé and took an option to buy the Swiss food firm's entire 77% stake at a later stage.

When Novartis in January played the option and offered to buy out minority shareholders, the total takeover price equaled about $50 billion, making it the costliest and by now one of the most protracted acquisitions in Swiss corporate history.

Far from winning plaudits for such risk-taking, Novartis initially ran into stiff resistance from the three-member independent committee on Alcon's board. Novartis also met criticism from some of its own investors, who argued the firm paid too much.

The offer to minority holders, which involves an exchange for Novartis stock, initially valued Alcon at $153 a share. That surprised analysts and investors because it was not only below Alcon's trading price at the time—Novartis felt that price was inflated by takeover speculation—but far below the $180-a-share price for the remaining Nestlé stake.

Analysts expect Novartis will have to improve that offer, and investors clearly concur. At the U.S. closing price of $148.19 a share Wednesday, Alcon shares were still more than 9% above the offer price based on where Novartis is trading.

Piper Jaffray analyst Matt Miksic, who covers Alcon, expects Novartis will have to pay somewhere between that price and $180 a share to buy out minority holders without a fight. "I think the deal gets done somewhere in between, or it takes a long time to play out in court," he said.

Novartis officials declined comment for this story, but the company has indicated it believes owning most of Alcon gives it the clout to buy the rest on its own terms while overriding the independent directors.

But those directors disagree, citing the legal opinion of Hans Caspar von der Crone, whom they described as "a leading Swiss legal and corporate governance expert," as well as Alcon's recent financial results. Alcon's first-quarter earnings rose 27% on 15% revenue growth.

Novartis, though, remains strained by analysts' perception that it is overpaying for Alcon by several billion dollars.

Completing the deal is crucial to Novartis's realizing deal-related savings that could top $300 million a year. Alcon has a large business for eye drugs, and some overlap with Novartis in the market for contact-lens-care products.

"Full ownership of Alcon will give Novartis the ability to run the business and get access to the company's cash flow," Vontobel analyst Andrew Weiss said. "If they only hold 77% of the firm, they would have to continue to report to minority shareholders and be under constant scrutiny from the independent board of directors."‹