Zurich: Switzerland’s Novartis aims to buy the rest of US eye care group Alcon for a total $39.3 billion, including a majority stake from Nestle, to diversify away from prescription drugs.
Novartis said on Monday it would exercise an option to acquire a 52% stake in Alcon from Nestle, the world’s largest food group, for $28.1 billion, boosting its holding in Alcon to 77%. The Swiss drugmaker bought an initial 25% stake in 2008.
Novartis, which had been widely expected to snap up the stake, also plans to buy out the 23% held by Alcon minority shareholders for $11.2 billion, ending uncertainty as to whether or not it would go for 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.
Jeffrey Holford, an analyst at stockbroker Jefferies in London, said Novartis needed full control of Alcon to achieve its planned synergies and would likely end up paying more.
The fixed exchange ratio proposal of 2.80 Novartis shares for each remaining Alcon share is less generous to minorities, amounting to $153 per share compared with the $180 agreed with Nestle.
“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 chief executive Daniel Vasella said he was confident Alcon minority shareholders would accept the offer.
Alcon said its independent director committee was reviewing the Novartis offer, but noted that minorities were being offered about 15% less than what Novartis is paying Nestle.
Vasella told a conference call: “It’s an excellent opportunity to acquire the world leader in eye care,” adding the two companies had complementary portfolios and Alcon could benefit from Novartis’ wide geographic reach.
“It’s a great strategic fit and I’m very optimistic about the outlook for the business.”
Novartis said it expected to complete the deal in the second half of the year, funding it from available cash resources and up to $16 billion of external debt financing.
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.
Novartis said it expects about $200 million of annual pretax cost synergies within three years after closing with the 77% stake through shared service agreements, collaborations, joint ventures and other business arrangements.
But Vasella said Novartis did not expect big job cuts as expected job creation should balance out redundancies.
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 programme for two years once its existing 25 billion programme is completed this year, less than some had forecast.
Nestle shares were 1.1% higher at 50.75 Swiss francs at 0911 GMT, compared with a 0.7% rise in the DJ Stoxx European food and beverage index, while Novartis dipped 0.8% to 56.05 francs, compared with a 0.6% firmer DJ Stoxx European healthcare sector.
Analysts say Nestle could also use some of the Alcon proceeds for acquisitions, with the fiercest speculation around whether it might enter the fray for British chocolatier Cadbury and bid against Kraft Foods.
“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 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.