Alcon board agrees to Novartis merger

Huenenberg, Switzerland-A year after Novartis AG announced its intention to acquire the controlling shares of Alcon Inc., the companies have agreed on merger terms that raise the offer to minority shareholders of the world's largest eye-care company by $15 per share.

Alcon announced Dec. 15 that its board of directors, including the Independent Directors Committee (IDC) that had bitterly contested Novartis' original offer, had approved the $12.9 billion merger.

Terms raise the original offer from $153 per share in January 2010 to $168 per share, which equals the average price Novartis paid Nestle in two transactions for its shares to gain majority ownership. In 2008 Novartis paid Nestle $143 per share; in August it bought the rest of Nestle's Alcon shares for $180 each.

"We view the offer as a failure by the IDC to realize the value held by the existing minority shareholders," Pinkerton wrote in his Dec. 15 report. "While Novartis boldly stated the premium stands with the minority holder, we argue the premium stands with the last unit purchased that will allow Novartis to realize cost savings needed for the acquisition to make sense."

Louise Chen at Collins Stewart said the deal appears done; she downgraded her recommendation from "buy" to "neutral," and lowered her $180 price target to $168.

Although the merger is conditioned upon two-thirds approval by shareholders at Novartis and Alcon meetings, a source familiar with the negotiations noted that a shareholder vote is immaterial at this point, since Novartis shareholders, who hold 77% of the company, would approve the merger. Dates have not been set for the shareholder meetings.

The deal, which will be completed under Swiss merger law, is expected to close during the first half of 2011. Alcon will not pay a dividend to its shareholders under terms of the agreement.

While investors might have hoped for a better outcome, the agreement puts to rest the potential for a costly and long legal fight. In July, the IDC, led by Thomas G. Plaskett, had set aside $50 million in a trust in anticipation of that battle, and repeatedly called the original offer "grossly inadequate." The agency that had represented the IDC said Plaskett was unavailable for an interview, but in the Alcon release Plaskett said the "robust" negotiations resulted in a fair value for shareholders that he "strongly believe(s)" is in the best interest of shareholders.

"The expense and ultimate outcome of a protracted legal battle would not likely have been in anyone's interest, hence the settlement," noted Matt Miksic, senior research analyst with Piper Jaffray, in his Dec. 15 research note. "With respect to morale and the retention of key employees, we suspect that Novartis will take the steps required to smooth things over internally with the Alcon workforce, many of whom are minority shareholders, although the company has not publicly disclosed what additional steps it is taking in this regard."

Miksic lowered his previous target from $192 to $168.

Looking ahead

Novartis said in its announcement that Kevin Buehler, its president and chief executive officer (CEO), will lead the new eye-care division, which will include Novartis-owned CIBA Vision and ophthalmic medicines. Atlanta-based CIBA Vision sold 1.9 billion contact lenses in 2009, along with lens care solutions, and has 5,900 employees. Together, the unit will cover more than 70% of the global vision care sector, Novartis said.

"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 United States," said Joseph Jimenez, CEO of Novartis, in the company's release. "I am very pleased that we were able to come to this agreement and will be able to provide Alcon employees the full benefits of being part of the Novartis Group."

In an Alcon statement, Buehler congratulated the IDC and Novartis for resolving the dispute and thanked his 15,000 employees for their patience and continued focus in the face of the yearlong uncertainty. The merger, he said, positions Alcon for faster growth and the ability to expand its expertise as the second-largest division within Novartis, with sales that could top $8.7 billion.

"This merger will create a stronger eye-care business with broader commercial reach and enhanced capabilities to develop more new and innovative eye-care products that address unmet clinical needs in eye care," he said.

Alcon said the company will capitalize on commercial opportunities to develop and brand contact lenses collaboratively with contact lens solutions in order to capture new patients and increase the number of patients that use contact lenses to correct their vision.

The merger will be effected under Swiss merger law, according to a prepared statement. Completion is conditional, among other things, on two-thirds approval by the shareholders of both Novartis and Alcon voting at their respective meetings, and the registration and listing of Novartis shares on the SIX Swiss Exchange and American Depository Shares on the New York Stock Exchange to be issued as merger consideration. The merger is expected to be completed during the first half of 2011.