Swiss drug maker Novartis aims to buy the rest of the world's biggest eye care firm Alcon for $39.3-billion, including Nestlé's majority stake, to help it diversify away from prescription drugs.
Novartis said on Monday it was exercising an option to buy a 52-per-cent stake in Alcon from Nestlé for $28.1-billion, boosting its holding to 77 per cent after it bought an initial 25-per-cent stake from the world's largest food group in 2008.
Novartis, which was widely expected to snap up the Nestlé stake as soon as its option allowed, also aims to buy out the 23 per cent held by minority shareholders for $11.2-billion, ending uncertainty over whether or not it would seek full control.
Novartis and rival drug makers such as GlaxoSmithKline and Sanofi-Aventis are pushing into areas like consumer health care 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 Nestlé. For Reuters Breakingviews on Alcon, click on The expected tussle with minority shareholders echoes Roche's fight for full control of U.S. biotech group Genentech, which the Swiss drug maker finally clinched last year.
Alcon was founded in 1945 in Fort Worth, Tex., by pharmacists Robert Alexander and William Conner, who combined the first syllables of their surnames for the company name.
Bought by Nestlé 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 health care 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 officer Daniel Vasella.
Nestlé, the Swiss maker of Nescafe coffee and Kit Kat 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 Nestlé 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.
Nestlé shares were 1.9 per cent higher at 51.15 Swiss francs at 1150 GMT, compared with a 1.2 per cent rise in the DJ Stoxx European food and beverage index, while Novartis dipped 0.9 per cent to 56 francs, compared with a 0.8 per cent firmer DJ Stoxx European health care sector.
Alcon said its independent director committee was reviewing the Novartis offer, but noted that minorities were being offered about 15 per cent less than what Novartis is paying Nestlé.
Novartis CEO Mr. 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 Nestlé stake."
Mr. Holford said Novartis needed full control of Alcon to achieve planned annual pretax synergies, which it projects at $200-million three years after closing the deal with Nestlé. It sees a further $100-million on winning 100 per cent.
Morgan Stanley analysts said total synergies of $300-million appeared conservative, since consensus expectations had been around $700-million to $900-million a year.
Mr. Vasella said Novartis did not expect big job cuts as he expected job creation should balance out redundancies.
Once the deal is completed, Nestlé will have realized more than $40-billion from its gradual divestment of Alcon, including the sale of 23 per cent in an initial public offering in 2002.
"The 10 billion franc buyback announcement could disappoint investors and renew speculation that Nestlé is about to get involved in a large M&A transaction," said Kepler Capital Markets analyst Jon Cox.
Nestlé has always declined to comment on a possible Cadbury bid although CEO Paul Bulcke said in September the group had no plans for big acquisitions. Analysts say a more likely target could be U.S. baby food 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 Nestlé's position as the world's leading nutrition, health and wellness company," Mr. Bulcke said on Monday.
Novartis said it expected to complete the deal with Nestlé 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.
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