The eye care sector offers further growth opportunities underpinned by the increasing unmet needs of emerging markets and an aging population. The Alcon and Novartis eye care portfolios address a broad range of these unmet needs. The companies have complementary pharmaceutical portfolios for diseases in the front and back areas of the eye as well as strong global brands in lens care. Alcon is a global leader in ophthalmic surgical products while Novartis has a broad contact lens portfolio and advanced technologies.
"We are delighted to become majority owners of Alcon. Together, both companies can achieve their strategic priorities to deliver against patient needs through innovative and differentiated products" said Joseph Jimenez, CEO of Novartis.
"I believe that Alcon will benefit from having a majority owner that is a global leader in health care," said Kevin Buehler, President and CEO of Alcon. "With this change, Alcon and Novartis can seek out opportunities to create greater value through arm's-length agreements that leverage our combined strengths and capabilities."
With the achievement of the 77% majority ownership, Novartis and Alcon will be able to create greater value together for all stakeholders through collaborations that would benefit both companies. These could include opportunities with Lucentis®, for example, utilizing the companies' complementary field forces around the potential launch of Lucentis for Diabetic Macular Edema. In addition, joint sourcing and procurement programs could leverage the combined purchasing volume of both companies. Other opportunities include optimization of lens care manufacturing and research collaborations. All collaborations between the companies would be within the framework of arm's length transactions.
These value creating opportunities between the two companies could generate approximately USD 200 million of potential annual pre-tax cost synergies.
As announced on January 4, 2010, Novartis has proposed to simplify Alcon's ownership structure by offering to acquire the remaining 23% held by minority shareholders. To attain full ownership, a direct merger of Alcon into Novartis AG is proposed under the Swiss Merger Act at a fixed exchange ratio of 2.8 Novartis shares for each remaining Alcon share. In arriving at this proposal, Novartis considered a number of factors, including an assessment of the fundamental value of Alcon, and the unaffected Alcon share price as adjusted for speculation regarding the intentions of Novartis.
Achievement of 77% majority ownership of Alcon
Novartis and Nestlé entered into an agreement in April 2008 for the sale of Nestlé's 77% majority stake in Alcon to Novartis in two steps. The total cost to Novartis for the 77% majority stake of Alcon is USD 38.7 billion (USD 168 per share). In July 2008, Novartis acquired in a first step a 25% stake in Alcon for USD 10.4 billion and the additional 52% stake has been acquired for USD 28.3 billion.
Divestments required from regulatory decisions vary by market and had 2009 sales of approximately USD 100 million.
Financial impact of Alcon majority ownership to Novartis
The overall purchase price of USD 38.7 billion includes certain adjustments for dividends and interest until closing. The transaction for 77% ownership, including the initial 25% stake purchased in mid-2008, was funded with USD 17.0 billion of available cash, and USD 13.5 billion from bonds raised in March 2010 as well as in 2008 and 2009, with the remaining USD 8.2 billion financed with US commercial paper issued in 2010. The all-in external financing costs are currently 2.5% per year.
With the 77% majority ownership Alcon will be fully consolidated in the Novartis financial reporting. Based on the limited access to Alcon the following accounting implications are estimates and will be finalized for the Novartis 2010 year-end reporting. However, preliminary assessments show that the initial 25% stake in Alcon needs to be revalued to its deemed fair value resulting in an approximately USD 200 million gain in 2010. The preliminary estimate of the additional pre-tax amortization of intangible assets is approximately USD 2.1 billion per year, with an estimate for the balance of the four months of 2010 being USD 400 million including inventory step-up. One-time costs to achieve the USD 200 million annual synergies are expected to be approximately USD 140 million incurred over the next three years. Other items to be charged in 2010 total approximately USD 140 million, which include transaction expenses and other charges.
The acquisition of 77% majority ownership of Alcon is expected to be broadly neutral to reported earnings per share in 2010 and 2011, but show for the same period low single digit and high single digit accretion to core earnings per share. On a fully synergized basis earnings per share accretion in 2011 is around low double digit.