When Novartis announced on Jan. 4 its intention to not only exercise its option to purchase Nestle's remaining 52 percent stake in eye-care group Alcon, but also to buy out the remaining, minority-held 23 percent, CEO and Chairman Daniel Vasella claimed this second step would "create clarity for all stakeholders". So far, it has apparently done anything but.
Novartis is offering them a per-share price now worth about $150 - the figure fluctuates with Novartis' share price (1 'The Pink Sheet' DAILY,Jan 4, 2010). That is significantly below the fixed $180 cash figure it agreed to pay Nestle for the 52 percent stake.
The furor - and threatened action if the Swiss Big Pharma doesn't raise its offer - may risk delaying Novartis' smooth integration of the group with its own ophthalmology assets to create an eye-care powerhouse, and its planned achievement of up to $300 million in cost synergies. It also risks damaging employee morale given that Alcon workers make up a significant share of the minority holders.
The Minority Fight Back
The Independent Director Committee's response was posted on a 2 newly created Web site dedicated to explaining why Novartis' offer is so ludicrous, and angrily rejecting the Swiss Big Pharma's "coercive attempts to take advantage of Alcon's minority shareholders."
Vasella declared on a conference call announcing the Jan. 4 deal that the minority holders would, under Swiss merger law, have no power to reject the squeeze-out and thereby block a full takeover, given that Novartis would by then own more than the required two-thirds of Alcon and have a majority board position.
The IDC strongly refutes the legal basis of that claim, as well as deploring Novartis' heavy-handed tactics. It claims that Swiss law, and Alcon's organizational regulations, specifically protect minority rights by requiring that a committee of independent directors approve a proposed merger with a majority shareholder. It also points out that Vasella himself, appointed to Alcon's board in 2008, approved the formation of such an independent committee in December 2008 after Novartis' initial purchase of 25 percent of Nestle's Alcon holding earlier that year. (3 'The Pink Sheet' DAILY, April 7, 2008).
It's quite possible, as some observers claim, that the minority holders don't have a leg to stand on, not least because Novartis has tied up most of the large Swiss law firms. Regardless, the Alcon minority shareholders are going to put up a fight unless Novartis comes up with a better offer. "We'll take all appropriate and available steps to ensure our rights are protected," summed up IDC Chairman Thomas Plaskett.
Shareholders Seeking $175-180 Per Share
The IDC wouldn't comment during a Jan. 20 conference call on precisely what price they deemed fair, stating that it was "not appropriate" to put a stake in the ground at this stage.
But one large minority shareholder indicated that a price between $175 and $180 per share would be "the lowest I'd be willing to accept" - in other words, something close to what Novartis is offering Nestle in this second leg of the transaction (in the first leg, Novartis paid the food group $143 per share).
He and others claim that Novartis' valuation is unrealistic. Novartis was at pains on Jan. 4 to describe the "great lengths" it had gone to - including using multiple valuation methods - to calculate what Chief Financial Officer Raymund Breu described as a "solid, fair price" for the minority holders, based largely on what it called an "unaffected" figure of $137 (what it believes the Alcon shares would be worth without deal-related speculation). Admittedly, however, this price excluded a hefty control premium paid to Nestle.
According to the Alcon minority shareholder, however, "it's a lot more complicated than control premiums." He argued that many of the minority shareholders have held and supported the stock for many years, and planned to hold it for many more still. As such, "we're not being offered enough, on the basis of our fidelity, and the opportunity cost" associated with relinquishing Alcon shares.
In particular, he dismissed Novartis' use of comparators in the medical device sector in its valuation calculation. "That's a terrible comparison," he said, given Alcon's predominant position in ophthalmology - it's the world's leading ophthalmic surgical products group - versus the oligopoly situation in, for instance, the drug-eluting stent, hip and other markets serviced by players such as Stryker and Medtronic. "Comparing Alcon to the basic [replacement] knee market is crazy. A lens that can restore sight costs $100, compared to $3,000 for a new knee."
He also argues that Novartis' valuation assumes a slow-down in the overall Alcon business, which he rejects. Valuing companies is notoriously difficult, however. Comparator analysis wasn't the only method Novartis adopted, and where it did, it used a variety of indices. Alcon did revise its earnings forecasts downward slightly in October 2009.
Still, the general paradox here is that Novartis, too, believes in the value and future growth of Alcon -otherwise it wouldn't be buying the company. It, too, recognizes the value of the eye-care market relative to many other sectors, both in emerging and developed countries. (See 4 'Novartis' New Kind of Pharma Deal,'IN VIVO, April 2008 and 5 'Venture Eyes Ophthalmology--And Likes What It Sees,' START-UP, October 2009.)
A Negotiation Game
As such, the Big Pharma has probably just pulled the opening shot in what will likely be a negotiation -hopefully one that doesn't reach the law courts. "Novartis needed to have a stick in step one of the negotiations," says one person close to the deal. "If they'd started at $180 per share, everyone would have wanted $200. So by drawing the line where they did, they open it up to the next level."
And Novartis has a fiduciary duty to its own shareholders, too, not to overpay for this asset - one that will cost close to $50 billion even if it successfully forces the minority to accept the current price.
But a protracted legal battle wouldn't delight Novartis' shareholders either, and, in terms of lost time, opportunity, and management distraction, would arguably hurt Novartis more than the minority. Plus, argues the shareholder, "They would not want to damage the Alcon brand ... by removing key employees."
IDC Chairman Plaskett described the situation as "a bit like a playground bully who takes your lunch money and splits it with his best buddy." But despite Novartis' rather aggressive, hard-line tactics - and its "no comment" on the latest developments - it's reasonable to assume the Swiss group will at least consider making another offer.
Breu did comment in an interview a couple of days after the deal was announced that his shareholders would "get nervous" if the group raised its bid. But given the vigor of this shareholder backlash, the company might be nervous already. "It's not in anyone's best interest to walk a long legal path," concludes Plaskett. The minority stakeholders are open to negotiation, in other words. Perhaps Novartis is, too.
- Melanie Senior (m.senior @elsevier.com)
This article also appeared in "The Pink Sheet" – Jan 25, 2010
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