Novartis seeks control of Alcon

Novartis plans to assume complete control over Alcon Laboratories Inc. in a two-step process that some analysts and some members of Alcon's board of directors are challenging for its fairness under U.S. and Swiss merger laws.

The deal, announced Jan. 4, begins with Novartis exercising its option to purchase Nestle's 52% share of Alcon for $28 billion, giving Novartis 77% majority ownership of the largest eye-care company in the United States.

Upon gaining majority control of Alcon's board, Novartis officials said they would seek-and expect to gain through a simple majority vote -control over the remaining 23% now held by independent minority shareholders, including mutual funds and private individuals.

The "fair price" has become a source of contention between Novartis, which Chief Executive Officer Daniel Vasella, MD, said "went to great lengths to determine a fair offer," Alcon's Independent Director Committee, and analysts. The committee announced in a Jan. 4 statement it was "disappointed" that Novartis is attempting to "circumvent" minority shareholder protections, and it filed a lawsuit in U.S. District Court in New York to fight the price offered in the takeover. Novartis spokesman Eric Althoff declined to comment on pending litigation.

Novartis is offering Nestle $180 per share, for a total price of $28.1 billion, as the second stage of its purchase from Nestle. In April 2008, Novartis purchased 23% for $143 per share, a total of $10.4 billion.

Novartis is proposing to give minority Alcon shareholders 2.8 Novartis shares for each remaining Alcon share-a price then estimated at $153 per share, but that has since dropped to about $147. Novartis Chief Financial Officer Raymund Breu, PhD, said the offer reflects a 12% premium over the "unaffected price" of $137 per share-which, in his opinion, more accurately reflects Alcon's fundamental value, considering lower earnings expectations since 2008 and price vaults based on speculation about Novartis' acquisition.

"In our view, the current Alcon share price is inflated above each fundamental value as a result of speculation regarding our potential purchase of the remaining minority," Dr. Breu said in a Jan. 4 conference call with investment analysts.

Reaction from analysts

Analysts reacted sharply to Novartis' explanation since shares had been trading 7% higher on Dec. 31 and because of the higher premium the company is offering Nestle for its shares. Dr. Breu and Dr. Vasella explained that Nestle will get more per share because its shares would give Novartis majority control of the board, allowing it to complete the takeover, they believe, with a simple majority vote.

"This is very much in line with what minority shareholders in similar transactions have received," Dr. Breu said on the call.

"It's very important to understand this is not a tender offer," Dr. Vasella added. "It's a merger offer … for two companies [that] are incorporated in Switzerland. And that is a fundamentally different situation [from] a usual tender offer. And the only condition is that we offer a fair price."

The fairness of that price is under consideration by Alcon's Independent Directors Committee-consisting of Joan W. Miller, MD, chief of ophthalmology, Massachusetts Eye & Ear Infirmary, and chairwoman of the department of ophthalmology, Harvard Medical School; financial expert Thomas G. Plaskett; and health-care executive Lodewijk J.R. de Vink. The board has hired investment banking firm Greenhill & Co. to analyze the offer. Dr. Miller referred all questions to Steven Lipin of New York-based corporate communications firm Brunswick, but Lipin did not return calls seeking comment.