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Novartis seeks to buy rest of Alcon for $39 billion
ZURICH (Reuters) – Swiss drugmaker Novartis aims to buy the rest of the world’s biggest eye care firm Alcon for $39.3 billion, including Nestle’s majority stake, to help it diversify away from prescription drugs.
Novartis said on Monday it was exercising an option to buy a 52 percent stake in Alcon from Nestle for $28.1 billion, boosting its holding to 77 percent after it bought an initial 25 percent stake from the world’s largest food group in 2008.
Novartis, which was widely expected to snap up the Nestle stake as soon as its option allowed, also aims to buy out the 23 percent held by minority shareholders for $11.2 billion, ending uncertainty over whether or not it would seek full control.
Novartis and rival drugmakers such as GlaxoSmithKline and Sanofi-Aventis are pushing into areas like consumer healthcare and generics as they face the biggest loss of patent protection in history.
To win full control of Alcon, analysts predict Novartis will have to increase its current offer to minorities of 2.80 Novartis shares for each remaining Alcon share, which amounts to just $153 per share compared with the $180 agreed with Nestle.
The expected tussle with minority shareholders echoes Roche’s fight for full control of U.S. biotech group Genentech, which the Swiss drugmaker finally clinched last year.
Alcon was founded in 1945 in Fort Worth, Texas by pharmacists Robert Alexander and William Conner, who combined the first syllables of their surnames for the company name.
Bought by Nestle in 1977 for $280 million, it is the global leader in ophthalmic surgery products, particularly for cataract operations, and also produces medicines for eye diseases like glaucoma as well as contact lens products.
Novartis will bring it together with its own CIBA Vision contact lens business to create an enlarged eye care business with pro-forma 2008 net sales of $8.5 billion.
“The addition of Alcon will strategically strengthen our healthcare portfolio and our position in eye care, a sector with dynamic growth due to the increasing patient needs of an aging population,” said Novartis Chief Executive Daniel Vasella.
Nestle, the Swiss maker of Nescafe coffee and KitKat chocolate bars, said in a separate statement the deal would allow it to launch a new 10 billion Swiss franc ($9.64 billion) share buyback program for two years once its existing 25 billion program is completed this year.
That was less than some analysts had forecast, stoking speculation Nestle could also use some of the Alcon proceeds for buys, possibly entering the fray for British chocolatier Cadbury amid a hostile bid from Kraft Foods.
Nestle shares were 1.9 percent higher at 51.15 Swiss francs at 1150 GMT, compared with a 1.2 percent rise in the DJ Stoxx European food and beverage index, while Novartis dipped 0.9 percent to 56 francs, compared with a 0.8 percent firmer DJ Stoxx European healthcare sector.
Alcon said its independent director committee was reviewing the Novartis offer, but noted that minorities were being offered about 15 percent less than what Novartis is paying Nestle.
Novartis CEO Vasella said he was confident minority shareholders would accept.
Jeffrey Holford, an analyst at stockbroker Jefferies in London said: “What we are seeing here is the starting point of a negotiation. It think they’ll end up paying more for it, but they are trying to not pay more than they are paying for the Nestle stake.”
Holford said Novartis needed full control of Alcon to achieve planned annual pre-tax synergies, which it projects at $200 million three years after closing the deal with Nestle. It sees a further $100 million on winning 100 percent.
Morgan Stanley analysts said total synergies of $300 million appeared conservative, since consensus expectations had been around $700 million to $900 million a year.
Vasella said Novartis did not expect big job cuts as he expected job creation should balance out redundancies.
Once the deal is completed, Nestle will have realized more than $40 billion from its gradual divestment of Alcon, including the sale of 23 percent in an initial public offering in 2002.
“The 10 billion franc buyback announcement could disappoint investors and renew speculation that Nestle is about to get involved in a large M&A transaction,” said Kepler Capital Markets analyst Jon Cox.
Nestle has always declined to comment on a possible Cadbury bid although Chief Executive Paul Bulcke said in September the group had no plans for big acquisitions. Analysts say a more likely target could be U.S. babyfood group Mead Johnson Nutrition Co, valued at around $9 billion.
“This divestment of our interest in Alcon will enable our management to concentrate on accelerating the development of Nestle’s position as the world’s leading nutrition, health and wellness company,” Bulcke said on Monday.
Novartis said it expected to complete the deal with Nestle in the second half of the year, funding it from available cash resources and up to $16 billion of external debt financing.
The plan to pay minorities in Novartis shares rather than cash will help the Swiss company maintain its credit rating.
It will also ask its shareholders to approve the issuance of 98 million new shares to pay for the Alcon minority shares, together with 107 million shares held in treasury.