NVS Acquires Majority Share in ACL - Analyst Blog - Novartis (NYSE:NVS)

Novartis AG (NVS) recently became a majority shareholder of eye care company Alcon Inc. (ACL) following the purchase of about 156 million shares from Swiss corporation Nestlé S.A. (NESN.VX) for $28.3 billion.

On April 6, 2008, Nestlé had signed a purchase and option agreement with Novartis, whereby Nestlé agreed to sell about 74 million of its share of Alcon’s common stock to Novartis. At that time, Novartis acquired a 25% stake in Alcon for $10.4 billion. In early January 2010, Novartis announced its intention to gain full ownership of Alcon.

Following the recent transaction with Nestlé, Novartis now holds a 77% stake in Alcon. Novartis’ outlay for acquiring the entire 77% stake in Alcon comes to about $38.7 billion.

Focus on Minority Stake

Novartis is now looking to acquire the balance 23% from Alcon’s minority shareholders. Earlier this year, Novartis had extended an offer to Alcon shareholders under which each Alcon share will receive 2.8 shares of Novartis.

However, Alcon’s Independent Director Committee referred to Novartis’ proposal as “grossly inadequate” and “fundamentally flawed”. As of August 25, 2010, the proposal was valued at $142 per Alcon share, well below the $181.71 in cash that was paid by Novartis to acquire its majority position.

In fact, Alcon shares are currently trading at $160.37, which is again above the offer price. The Committee stated that it will evaluate and take appropriate action to ensure that the rights of the minority shareholders are protected.

The acquisition of Alcon will help Novartis diversify and make up for revenues lost to generic competition. Moreover, it will help the company strengthen its position in the eye care market, which presents significant growth potential thanks to the unmet needs of the aging population. Once the merger is completed, Novartis’ eye care segment will consist of Alcon, CIBA Vision and select eye care medicines.

Neutral on Alcon

We currently have a Neutral recommendation on Alcon. We believe the company’s business model remains fundamentally strong. The company has also done an excellent job with cost-control which should continue to benefit operating margins. Meanwhile, continued international penetration, new product launches and market share gains will be the fuel for future revenue growth.

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NVS Acquires Majority Share in ACL - Analyst Blog

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