Corporate Finance : Strategic Acquisitions Still Getting Done




With the credit crunch putting a damper on private equity deals, mergers and acquisitions have declined, but companies are still willing to dip into cash reserves and even borrow significant amounts of money to finance strategic takeovers that promise to boost earnings growth.

Novartis, one of Switzerland’s largest drug makers, agreed last month to spend $39 billion on a two-step purchase of Alcon, the world’s largest and most profitable eye-care company.

“Eye care will continue to grow dynamically, as there is a growing unmet medical need, driven primarily by the world’s aging population,” says Daniel Vasella, chief executive of Basel-based Novartis. “The margins are higher than our pharma business and are obviously very attractive,” he says.

The Alcon purchase also complements Novartis’s Ciba Vision business and its Lucentis drug for treating macular degeneration in the elderly, a condition in which the inner lining of the eye thins, which can cause loss of central vision.

Novartis will initially pay Vevey, Switzerland-based food company Nestlé $11 billion for a 25% share of Alcon, which makes Opti-Free contact lens solution and Travatan glaucoma medicine, as well as surgical equipment and implantable lenses. Novartis also will have the exclusive right to buy Nestlé’s remaining 52% holding in Alcon for about $28 billion between January 2010 and July 2011.

Novartis will finance the first step of the deal by issuing $5.5 billion of debt, temporarily suspending its share-buyback program and using cash reserves. Credit Suisse advised Nestlé on the sale, and Goldman Sachs advised Novartis on what will be one of the largest M&A; deals ever in Switzerland.

Novartis lost its AAA rating at Moody’s Investors Service and Standard & Poor’s as a result of its agreeing to use debt to fund the Alcon purchase. S&P; credit analyst Olaf Toelke, based in Frankfurt, says the debt will lead to significantly increased leverage at Novartis. “This action is a marked deviation from the group’s former conservative financial policy,” he says.

Hunenberg, Switzerland-based Alcon, the world’s largest eye-care company, was founded in Fort Worth, Texas, and is expanding rapidly in emerging markets in Asia and elsewhere. It is the leading provider of cataract surgery instruments, at a time when the procedure is just starting to become popular in many of these countries. The eye-care business is less crowded than other medical markets and has a huge growth opportunity, according to Vasella.

Last year Novartis purchased Nestlé’s medical nutrition and Gerber baby foods businesses for about $8 billion. Owner of such well-known brands as Nescafé instant coffee, Perrier bottled mineral water and Dreyer’s ice cream and frozen yogurt, Nestlé has been spinning off its non-food businesses in recent years to focus on food, diet and lifestyle products.
The Alcon deal was a last hurrah for Peter Brabeck-Letmathe, Nestlé’s outgoing chief executive, who handed the reins last month to Paul Bulcke, who headed Nestlé’s business in the Americas. Brabeck-Letmathe will continue as a non-executive chairman.

Novartis has diversified its business in recent years from prescription drugs into such areas as vaccines, eye care and generic drugs. It acquired vaccine maker Chiron in 2006 for $5.7 billion. Its Sandoz generic business is the second largest in the world after Israel-based Teva Pharmaceutical Industries.

Pharmaceutical companies are under pressure to curb soaring prices for prescription drugs at the same time as their costs for research and development are rising. Vasella says he wants to expand in faster-growing areas of the market where Novartis can diversify its risk.







Gordon Platt