Novartis Clinches Alcon In $12.9 Bln Deal

Swiss drug maker Novartis (NVS) will pay $12.9 billion to buy the remaining shares of Alcon (ACL) it doesn't already own to broaden its presence in the booming eye-care market, which is expected to outgrow the pharmaceuticals market in coming years.

Basel, Switzerland-based Novartis said each shareholder of Alcon will get $168, representing a premium of 3.4 percent to Alcon's closing price on Tuesday at $162.43 on the NYSE.

On Swiss Exchange, Novartis shares were up 5 percent on Wednesday at 56.55 Swiss Francs. Meanwhile, ADRs of Novartis ended Tuesday's trading on the NYSE at $55.83.

The deal, worth more than $51 billion in total, allows Novartis to gain significantly from the potential opportunities in the eye care sector, driven by the increasing unmet needs of emerging markets and an aging population.

Hunenberg, Switzerland-based Alcon makes Opti-Free line of contact lens solutions and is one of the largest makers of equipment used for laser vision correction and cataract removal, an area that is set to benefit from aging populations.

Apart from this, Alcon would be an excellent fit with Novartis, which has a broad contact lens portfolio and advanced eye care technologies and an early pipeline of innovative ophthalmic medicines.

Meanwhile, Alcon would also provide new sources of revenue to Novartis when patents on its best selling products like hypertension drug Diovan and the Gleevec leukemia treatment start to expire in the U.S. in 2012.

Recently, Novartis faced some setbacks in its cancer studies. In December, Novartis pulled Zometa's marketing application for an early breast cancer indication after the drug failed to meet its primary endpoint in a late stage study. The company also discontinued a non- small cell lung cancer study in November.

With this step Novartis takes full ownership, becoming the global leader in eye care, a rapidly expanding, innovative platform based on the growing needs of an aging population, said Daniel Vasella, Chairman of Novartis.

The growth synergies here are significant, as Alcon will be the eye care development engine for our best in class research organization, and will leverage the Novartis market access capabilities outside the US, said Joseph Jimenez, CEO of Novartis.

Novartis, which raised its stake in Alcon to 77 percent in August by buying Nestle's 52 percent stake in the company for $28.3 billion, has been trying to get full control of the company since January. But its original offer of 2.8 Novartis shares for each share of Alcon has faced strong opposition from Alcon's minority shareholders.

On Wednesday, Novartis brought an end to the more than 11-month dispute with minority shareholders by introducing a cash element to the offer.

The Deal

Novartis said the merger consideration will now include up to 2.8 Novartis shares and would be boosted with cash, if necessary, to ensure that each Alcon shareholder gets $168. Novartis will issue a maximum of 215 million common shares.

Novartis said if the value of 2.8 Novartis shares is more than $168, the number of Novartis shares will be reduced accordingly and that a share buyback would be reactivated to minimize dilution to Novartis shareholders.

Novartis, which has suspended its buyback program in April 2008, has authorization to buy back shares up to a maximum amount of 10 billion Swiss francs. Under this authority, Novartis has repurchased shares worth 300 million Swiss francs.

The Independent Director Committee (IDC) of Alcon has recommended the approval of the merger agreement to the Alcon board.

I congratulate the entire Alcon board, including the IDC, and Novartis for achieving a favorable resolution on the merger in a manner consistent with our Organizational Regulations. This now allows us to begin planning for the integration and creation of a dynamic eye care division within Novartis after final shareholder approval, Alcon CEO Kevin Buehler, said in a statement.

However, the deal is subject to other customary closing conditions including clearance of a registration statement by the U.S. Securities and Exchange Commission, two-thirds approval by the shareholders of each of Novartis and Alcon.

On the assumption that the merger closes on April 1, 2011, Novartis expects the deal to be about 5 percent dilutive to its earnings per share, and about 3 percent dilutive to core earnings per share based on Novartis' current share price.

Assuming cash payment of about $900 million to Alcon shareholders and a share buyback of $5 billion, the deal is expected to reduce earnings by about 3 percent, while being neutral to core earnings per share - a measure that excludes one-item items from earnings.

To finance the acquisition, Novartis said it will launch a share buyback worth around $5 billion and use a cash amount of nearly $1 billion from internal resources.

The deal, however, will not affect Novartis' AA credit rating. Moody's rates the Group as Aa2 for long-term maturities and P-1 for short-term maturities, while Standard & Poor's has a rating of AA- and A-1+, for long-term and short-term maturities, respectively. Fitch has a long-term rating of AA and a short-term rating of F1+.

Novartis expects annual cost synergies of $300 million, higher than $200 million that would have resulted from a partial acquisition.

Further, the deal is also expected to result in an additional $130 million revaluation gain. The total revaluation gain is now expected to be $330 million. One-time expenses in 2010 are now estimated to consist of $470 million inventory revaluation and $100 million transaction costs.

Upon completion of the merger, Alcon will become the second largest division within Novartis that is expected to generate more than $8.7 billion in sales covering more than 70 percent of eye care segment.

In addition, by buying Alcon, Novartis will boost its eye-care portfolio that includes Ciba Vision and the Lucentis blindness medicine.

The new Alcon division will be led by Kevin Buehler, current President and CEO of Alcon, Inc.

Alcon is one of the world's largest and most profitable eye care company with more than 15,500 employees in 75 countries and 2009 annual sales of $6.5 billion, operating income of $2.3 billion and net income of $2.0 billion.

Novartis, which employs about 100,000 people in more than 140 countries, generated about $44.3 billion in net sales, $9.98 billion in operating income and $8.45 billion in net income.

Restructuring On Cards?

Generally, a big ticket deal always culminates in a slew of restructuring actions. Several pharma majors have announced significant job cuts after a big acquisition in order to save costs.

Recently, regulatory pressures from US and Europe have forced Novartis' competitors like Roche, Pfizer and Merck to take cost cutting measures.

In November, Swiss pharma giant Roche said it plans to cut 4,800 jobs worldwide over the next two years, with majority of the planned layoffs in U.S. where Roche paid $47 billion in March 2009 to acquire the portion of Genentech it didn't already own.

New York-based Pfizer, the world's largest drug maker by sales, said it will cut about 19,500 jobs as part of its $68 billion deal to buy Wyeth.

Another pharma major Merck & Co. has said it will trim 15 percent of the company's workforce, or 15,000 jobs, following its $41.1 billion purchase of Schering-Plough.