Despite Dan Vasella’s assurances below, I question how easily the second stage of this acquisition will pass muster with antitrust regulators inasmuch as Alcon is the #1 company in consumer eyecare products and NVS is a leading companies in this business.
Insofar as NVS is taking on as much as $5.5B of new debt and suffering a reduced credit rating to finance this acquisition, another large acquisition by NVS during the next few years can be ruled out. (A small deal, such as buying the 44% of IDIX that NVS does not already own, is still readily doable.)
>> Novartis to Buy Nestle's Alcon Stake In Two Steps for Around $39 Billion
By ANITA GREIL and MARTIN GELNAR April 7, 2008 4:21 a.m.
ZURICH -- Unveiling one of the biggest deals in Swiss corporate history, Novartis AG Monday said it plans to buy Nestle AG's majority stake in U.S. eye-care company Alcon Inc. in two steps for around $39 billion, with the initial 25% stake changing hands in the second half of this year.
Novartis, based in Basel, Switzerland, said it will initially buy 74 million Alcon shares at a price of $143.18 a share, valuing the stake around $11 billion. Additionally, Novartis has the exclusive right to acquire Nestle's remaining 52% stake at a fixed price of $181, totaling $28 billion, between January 2010 and July 2011. Nestle also has the right to require Novartis to buy this stake.
Novartis gets the first tranche at a discount of around 5%, but will overall pay an estimated premium of 13% over Alcon's Friday closing price of $148.44.
Novartis doesn't plan to buy the roughly 23% of Alcon that is publicly traded, Chief Executive Daniel Vasella told reporters.
"We don't expect any antitrust hurdles to the deal, because the two businesses are very complimentary," he said. Novartis already is active in eyecare through its Ciba Vision contact-lens operations, and through Lucentis, a drug that treats a severe eye disease that can lead to blindness. Novartis acquired the rights to sell this drug outside the U.S. from Genenetech Inc.
Nestle officials have in the past few months hinted at an imminent sale of Alcon, majority-controlled by the Vevey, Switzerland-based food giant.
Alcon, a maker of devices for eye surgery and eye-care consumer products, had annual sales of $5.6 billion in 2007 and achieved a net profit of $1.6 billion.
The pact between the two Switzerland-based companies follows a similar arrangement last year when Nestle bought baby-food brand Gerber and the medical nutrition business from Novartis.
Novartis plans to finance the purchase of the 25% Alcon stake from internal cash reserves and external short-term financing. The company estimates it will need to borrow around $5.5 billion, and expects its long-term credit rating to be downgraded because of the deal. The company said it doesn't expect any change to its dividend policy, but will put its share buyback program on hold in favor of paying off debt related to the purchase. Novartis announced a buyback program worth 10 billion Swiss francs ($9.94 billion) in January.
Novartis said the first tranche of the deal will be dilutive to reported 2009 earnings per share by some 2% to 3%, but accretive by the same amount on adjusted EPS. Novartis will have a seat on the Alcon board of directors after the takeover of the first, 25% tranche. The second step will probably again be largely financed through Novartis's own cash, and further external borrowing, the company said.
Nestle said it would use the proceeds from the sale to reduce debt and to pursue acquisition opportunities in nutrition, health and wellness. Nestle is in the midst of a share buyback program. The company said the transaction will have a positive effect on reported earnings per share in 2008 and should be neutral on underlying EPS in 2008 and beyond.
The deal represents one of the biggest takeovers in Swiss corporate history since UBS AG bought U.S. brokerage Paine Webber for close to $12 billion in 2000, and its rival Credit Suisse acquired U.S. securities firm Donaldson Lufkin & Jenrette for a similar price in the same year.
Novartis shares recently traded 0.6% higher, while Nestle shares were up 2.7%. <<
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