Novartis intends to gain full ownership of Alcon Inc. by first completing the April 2008 agreement with Nestlé S.A. to acquire a 77 percent majority stake in a global leader in eye care and subsequently entering into an all-share direct merger with Alcon for the remaining 23 percent minority stake.
Novartis believes this merger, which will be implemented under the Swiss Merger Act, is in the interest of all stakeholders and will provide the needed clarity on Alcon's future.
Alcon will strengthen the Group's portfolio focused on healthcare and provide greater access to the fast-growing global eye care sector, which is driven by an aging population, innovation and emerging markets.
"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 Dr. Daniel Vasella, chairman and CEO of Novartis. "This is the right time to simplify Alcon’s ownership to eliminate uncertainties for employees and shareholders. It will also allow us to strengthen innovation power by combining R&D efforts and grow our global market presence thanks to our complementary product portfolios."
Alcon and Novartis have complementary eye care businesses
Alcon and Novartis have attractive global activities in eye care, each offering their own competitive positions in highly complementary segments that together cover more than 70 percent of the global vision care sector. Aligning these strengths can result in offering even more compelling products that make a difference for patients around the world.
Alcon, which is incorporated in Switzerland and has US operations based in Fort Worth, Texas, has developed leading positions in its three business sectors through a consistent focus on eye care since its creation in 1945:
Surgical (2008 sales: USD 2.9 billion)
Alcon is the global leader in cataract and vitreoretinal surgery, offering a portfolio of medical devices and ophthalmic surgery products. In 2008, more than 60 percent of micro-incision cataract surgeries – where the eye's lens is broken up, removed and replaced by an artificial intraocular lens (IOLs) – were performed with Alcon equipment. Alcon is also the global leader in IOLs based on the AcrySof family, which exceeded USD 1 billion of sales in 2008.
Pharmaceuticals (2008 sales: USD 2.6 billion)
Alcon has a portfolio of specialty medicines for various eye diseases, including glaucoma and conditions in the front of the eye such as infections and allergies. Strong growth has come from new product introductions and global expansion, particularly in Japan, where three new medicines have been launched since 2006.
Consumer (2008 sales: USD 0.8 billion)
Alcon provides a portfolio of contact lens care products, OTC (over-the-counter) dry eye drops and ocular vitamins, with emerging markets a key growth driver.
Novartis has long-standing activities in contact lenses, a sector in which Alcon is not active, and a complementary ophthalmic pharmaceuticals portfolio:
CIBA Vision (2008 net sales: USD 1.7 billion)
A global leader that generated 85 percent of its 2008 annual sales from contact lenses, CIBA Vision has been growing in 2009 thanks to new product launches in the Air Optix family of monthly silicone hydrogel lenses and the Dailies range of disposable lenses. CIBA Vision also offers a range of lens care products.
Selected ophthalmic pharmaceuticals (2008 net sales: USD 0.5 billion)
Novartis provides a range of complementary medicines used to treat a number of eye diseases not addressed by Alcon's portfolio. In addition to its product portfolio, Novartis has an extensive R&D pipeline with projects targeting novel ways to treat various forms of eye-related diseases. Lucentis (2008 net sales: USD 0.9 billion), a therapy for "wet" age-related macular degeneration that is a leading cause of blindness in people over age 55, will not be transferred to the new eye care division, but instead co-promoted, an approach that has already proven to be effective in Japan.
Following successful completion of the merger, Alcon would be established as a new Novartis division that incorporates these highly complementary assets. This new eye care division will have enhanced opportunities to accelerate expansion in high-growth regions, generate greater value from combined product portfolios and capitalize on strengthened R&D capabilities.
Alcon majority ownership transfer from Nestlé
Novartis and Nestlé entered into an agreement in April 2008 for the smooth transition of Nestlé's 77 percent majority stake in Alcon to Novartis.
In 2008, Novartis acquired a 25 percent stake in Alcon for USD 10.4 billion, or USD 143 per share, financed from internal cash reserves and external short-term financing.
On January 4, 2010, Novartis and Nestlé initiated completion of the 2008 agreement, whereby Novartis is exercising its call option to acquire Nestlé's remaining 52 percent Alcon stake for USD 28.1 billion, or USD 180 per share. This acquisition, which is subject to required regulatory approvals, is expected to be completed in the second half of 2010. This purchase will be funded from available liquidity and external debt financing.
Together, these transactions are estimated to cost approximately USD 38.5 billion, and at an average cost of USD 168 per share, which reflects a 17 percent premium over USD 143.18, which was agreed by Novartis and Nestlé to be Alcon's market price in April 2008.
With a 77 percent Alcon majority stake, Novartis believes approximately USD 200 million of annual pre-tax cost synergies could be generated within three years after closing through shared service agreements, collaborations, joint ventures and other business arrangements.
Merger proposal offers benefits to all stakeholders
The Novartis Board of Directors believes it is in the best interest of all stakeholders – the shareholders of Alcon and Novartis, their employees and the patients who benefit from their products – to simplify Alcon's ownership structure by making a proposal to acquire the remaining 23 percent held by minority shareholders.
Alcon will be an important contributor to Novartis, with its associates constituting the major part of a new eye care division that will benefit from access to the Group's global operations, expertise and resources. Attaining 100 percent ownership will also avoid speculation about the minority stake and enable the companies to move faster to achieve the full potential of the combined businesses.
To attain full ownership, a direct merger of Alcon into Novartis AG is proposed under the Swiss Merger Act. Novartis offers a fixed exchange ratio of 2.80 Novartis shares for each remaining Alcon share. Alcon's shareholders will have the choice of receiving Novartis American Depositary Shares (ADSs) as merger consideration.
Based on the Novartis closing share price of CHF 56.50 on December 30, 2009 (the last trading day before this announcement) and an exchange rate of CHF 1.04 = USD 1.00, this proposal represents an implied price of USD 153 per Alcon share and a 12 percent premium to Alcon's unaffected publicly-traded share price.
In arriving at this proposal, Novartis considered a number of factors, including: assessment of the fundamental value of Alcon; the unaffected Alcon share price as adjusted for speculation regarding the intentions of Novartis; the total per-share price of acquiring Nestlé's 77 percent majority stake and the governance rights afforded under Swiss law; lower earnings expectations for Alcon since April 2008; incremental cost synergies provided by the merger; appropriately comparable premiums typically applied to unaffected share prices for acquiring a minority stake; and the economic interests of Novartis shareholders.
Completion of the merger is expected to provide additional annual pre-tax cost synergies of approximately USD 100 million within three years after closing, driven mainly by elimination of public company expenses and consolidation of duplicate functions and processes. The strong growth outlook in eye care is anticipated to compensate for integration-related workforce reductions, which would be implemented in a socially responsible manner.
The merger will be conditional on the closing of the 52 percent stake acquisition from Nestlé and would require approval by the Boards of Directors of Novartis and Alcon. The merger would also require two-thirds approval by the shareholders of Novartis and Alcon voting at their respective meetings. This proposal does not include a due diligence condition. Under Swiss law, Novartis has the right to vote its Alcon stake in favor of the proposed merger.
Financial impact of proposed transactions to Novartis
Costs for full acquisition of Alcon, including the initial 25 percent stake purchased in mid-2008, are estimated at USD 49.7 billion.
The transaction to acquire Nestlé's remaining 52 percent majority stake for USD 28.1 billion is planned to be funded with available cash resources and up to USD 16 billion of external short- and long-term debt funding.
For the merger, Novartis will ask its shareholders to approve the issuance of 98 million new shares, which together with 107 million shares already held in treasury will be used to finance the acquisition of the Alcon minority shares at an implied cost of USD 11.2 billion. As of November 30, 2009, Novartis had 2,285 million fully diluted shares outstanding.
The board of directors has decided to use equity as a consideration to Alcon's minority shareholders to enable Novartis to maintain its strong credit rating, preserving its firm financial foundation and providing flexibility for future growth.
In the first year after closing, these transactions to increase the Group's stake in Alcon from 25 percent to 100 percent are expected to be approximately 9 percent dilutive to fully diluted earnings per share, but approximately 1 percent accretive to core earnings per share.