Changing hands

Zurich, April 7 (Reuters): Novartis AG has agreed to buy Nestlé’s 77 per cent stake in US company Alcon in a deal worth up to $39 billion to boost its eye care business, the Swiss drug maker said on Monday.

Novartis will at first acquire a 25 per cent stake in Alcon for $11 billion and will buy Nestlé’s remaining 52 per cent for a fixed price of $28 billion between January 2010 and July 2011.

“The margins are higher than our pharma business and are obviously very attractive,” Novartis chief executive Daniel Vasella told reporters.

Novartis is keen to broaden its business from prescription drugs, which face increasing competition from generic medicines and a tougher path to markets, to non-traditional areas such as vaccines, eye care and generics.

The price of the first stake is at a 4 per cent discount to Alcon’s closing price on Friday.

Novartis, Europe’s second-largest pharmaceutical company by market capitalisation will pay a 22 per cent premium to Alcon’s closing price if it went ahead with the purchase of the second tranche.

Nestlé can force through the purchase of the second tranche, but Novartis can opt out if there is a material change in the business, Novartis said.

The acquisition of the first stake values Alcon at 22.8 times expected 2008 earnings and the possible second step at a 2010 multiple of 22.5, according to Novartis.

The DJ Stoxx European pharmaceuticals sector is trading at an average 2008 multiple of 13.6 times.

The deal represents “a very rich price in our view despite the double-digit growth projected for the company (Alcon),” WestLB analyst Andreas Theisen said in a note.

Positive for Nestlé

Nestlé, the world’s largest food group, said the transaction would have a positive effect on its 2008 earnings per share. Shares in Nestlé were 2.5 per cent higher at 524.50 Swiss francs by 0838 GMT.

The deal will streamline Nestlé, which has long described its stake in Alcon as financial and said it “clearly has financial punch” for acquisitions with the Alcon proceeds.

“We consider Nestlé’s move as a positive step in its transformation into a ‘health, wellness and nutrition’ company,” said Vontobel analyst Claudia Lenz. “Moreover, the reduction in net debt gives Nestlé scope for further share buyback programmes.”

Novartis shares fell 1.2 per cent to 51.80 francs, under pressure from the high price of the deal.

“Alcon’s sales and margins are clearly higher than Novartis’s. However, the takeover structure may make cost savings difficult for several years,” said Landsbanki Kepler analyst Denise Anderson.

“In addition, like all pharmaceutical companies, Alcon has some patent risks. We therefore see the deal as mostly neutral to Novartis,” Anderson said.