Novartis to buy Nestle's Alcon stakes

Novartis AG has agreed to buy Nestle AG'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 drugmaker said yesterday.

Novartis will acquire a first, 25 per cent stake in Alcon for $11 billion and is set to buy Nestle'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 officer 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 like vaccines, eye care and generics.

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

Nestle 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 this year's earnings and the possible second step at a 2010 multiple of 22.5, according to Novartis.

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.

The deal will streamline Nestle, 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 Nestle'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 Nestle scope for further share buyback programs."

"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," Ms Anderson said.

Alcon, which makes medical devices and medicines for eye care as well as contact lens care products, will complement Novartis's own contact lens unit Ciba Vision.

Alcon, the world's largest eye care company with sales of $5.6 billion, will add to Novartis's own contact lens and eye medicine business, which had last year's revenues of about $2.5 billion.

Outgoing chief executive officer Peter Brabeck, who led a string of acquisitions to expand Nestle's health focus, is due to hand over the reins to new CEO Paul Bulcke.