By Dermot Doherty
(Bloomberg) — Novartis AG (NVS) offered to buy the rest of Alcon Inc. (ACL), the world's largest eye-care company, from Nestle SA (NSRGY) and minority shareholders for about $39.3 billion, as Chief Executive Officer Daniel Vasella expands into eye surgery.
Nestle will sell a 52 percent stake to the Basel, Switzerland-based drugmaker for an average of $180 a share, or a total of $28.1 billion, Novartis said today. Novartis also offered to pay 2.8 of its own shares for each remaining Alcon share held by the public, equivalent to about $11.2 billion, the company said.
Novartis is exercising a call option the Swiss companies agreed to in April 2008. By buying Alcon, the maker of Opti-Free contact lens cleaners, Novartis expands a portfolio of eye-care businesses including Ciba Vision and the Lucentis blindness medicine. Alcon had an operating profit margin of 35 percent in 2008 compared with Novartis's 22 percent. The drugmaker is counting on newer products to fuel growth as patents on the hypertension drug Diovan and the Gleevec leukemia treatment, its best sellers, start to expire in the U.S. in 2012.
"It's an excellent opportunity to acquire the world leader in eye care," Vasella said on a call with reporters. "Overall I think it's a great strategic fit and I'm very optimistic about the outlook of the business."
Alcon got 46 percent of revenue from devices and products used in eye surgery in 2008. Its products include Opti-Free contact-lens disinfectants, treatments for eye infections and glaucoma, and machines used in cataract operations. The company's surgical business generated $2.9 billion in sales in 2008, while its pharmaceuticals unit had revenue of $2.6 billion. Sales of consumer products such as eye drops and ocular vitamins amounted to $800,000.
Nestle divested a 25 percent stake in the company to Novartis in July 2008 for $10.4 billion. Nestle, the maker of Nescafe coffee, said today it will buy back 10 billion francs ($9.6 billion) of stock after selling the stake. The buyback signals that Nestle is unlikely to make a major acquisition such as Cadbury Plc in the immediate future, analysts said, though it has enough cash.
Nestle sold 23 percent of Alcon in a 2002 initial public offering for $2.2 billion. Novartis is offering to buy out those shares, which trade on the New York Stock Exchange, for the equivalent of $153 apiece.
Alcon declined $1.65, or 1 percent, to close Dec. 31 at $164.35 on the NYSE. The shares advanced 7.75 euros, or 6.9 percent, to 120 euros as of 11:45 a.m. in Frankfurt trading. Novartis fell 50 centimes, or 0.9 percent, to 56 Swiss francs in Zurich trading. Nestle rose 85 centimes, or 1.7 percent, to 51.05 francs.
Novartis will ask shareholders to approve the issue of 98 million new shares, which together with 107 million already held in treasury, will be used to finance the acquisition of the Alcon minority shares. The purchase of the minority stake is conditional on the completion of the Nestle deal and the approval of the Novartis and Alcon boards, as well as the companies' shareholders.
Alcon's independent director committee is reviewing the proposal for a merger of the two companies with a view to getting the best attainable value for its minority shareholders, the Hunenberg, Switzerland-based company said in a separate statement today.
The offer to buy out the minority shareholders is "a good move," said Helvea SA analyst Karl Koch. "It generally is good news in the sense that it alleviates concerns that they would not be able to pay the cost of capital because now they get full control and can realize the full synergies and that'll also help earnings," he said.
Novartis had $14.2 billion of cash as of Sept. 30. It said it will fund the purchase through available cash and external debt financing. The company expects synergies of about $300 million within three years after the completion of the deal. The transactions to gain full control of Alcon aren't expected to affect the group's credit ratings, the Swiss drugmaker said.
Novartis's Atlanta-based Ciba Vision unit makes contact lenses and lens-care products. The company also sells the Lucentis drug to treat macular degeneration, the leading cause of blindness in people over the age of 50.
"Alcon would round off the portfolio and the deal makes sense," said Falcon Private Bank's Dieter Buchholz, who manages $12 billion and owns shares of Nestle and Novartis, before the transaction was announced.
Vasella said he is "very confident" the merger will win regulatory approval because the businesses complement each other. Referring to the proposal to minority shareholders, he said he's "confident that the deal will eventually go through."
Nestle will have multiplied the value of its investment in Alcon by more than 140 times over 33 years, according to Bloomberg calculations. The company, based in Vevey, Switzerland, spent $280 million to buy Alcon in 1977, spokeswoman Nina Backes said. Nestle aimed to offset its risk in developing markets by expanding in the U.S. as inflation boosted food costs, according to Nestle's Web site.
Alcon's roots go back to a pharmacy Robert Alexander and William Conner opened in Fort Worth, Texas, in 1945. The name is a combination of the first parts of each of their last names.
To contact the reporters on this story: Dermot Doherty in Geneva at firstname.lastname@example.org; Tom Mulier in Geneva at email@example.com.
LIMITED-TIME OFFER SUBSCRIBE NOW