Business Context and Reporting Period
This Form 6-K, dated December 15, 2010, reports on Novartis AG's definitive agreement to acquire 100% ownership of Alcon, Inc. The transaction aims to establish Novartis as the global leader in eye care by creating a new USD 8.7 billion division. The merger is expected to close in the first half of 2011, subject to regulatory approvals and shareholder votes.
Key Financial Metrics and Transaction Details
- Transaction Value: Total consideration of USD 12.9 billion for the minority interest, valued at USD 168 per Alcon share.
- Consideration Structure: Comprises up to 2.8 Novartis shares per Alcon share and a Contingent Value Amount (CVA) settled in cash. Based on a Novartis share price of USD 56, the CVA is estimated at approximately USD 900 million.
- Share Issuance: Novartis will issue approximately 108 million new shares plus 107 million treasury shares (total 215 million) for the merger.
- Share Buyback: Reactivation of a share buyback program (up to CHF 10 billion authorization) to minimize dilution, with an estimated buyback of USD 5 billion.
- Alcon 2009 Performance: Sales of USD 6.5 billion, operating income of USD 2.3 billion, and net income of USD 2.0 billion.
- Novartis 2009 Performance: Net sales of USD 44.3 billion with USD 7.5 billion invested in R&D.
- Equity Impact: The acquisition is expected to result in a net reduction of consolidated equity by approximately USD 6.9 billion.
Material Changes and Financial Impact
- Earnings Dilution: Without a buyback, the merger is estimated to be 5% dilutive to fully diluted EPS and 3% dilutive to core EPS. With a USD 5 billion buyback, dilution is expected to be 3% to fully diluted EPS and neutral to core EPS.
- One-Time Costs: Estimated 2010 one-time expenses include USD 470 million for inventory revaluation and USD 100 million in transaction costs. Additional merger costs of approximately USD 80 million will be deducted from equity rather than the income statement.
- Revaluation Gain: An additional USD 130 million revaluation gain is expected from fair valuing the initial 25% interest, bringing the total revaluation gain to USD 330 million.
- Amortization: The change of majority ownership will result in an estimated additional pre-tax amortization charge of USD 2.1 billion on a full-year basis.
- Synergies: Annual cost synergies are expected to reach USD 300 million following full ownership.
Outlook, Risks, and Management Commentary
Management views the merger as the logical conclusion of their strategic investment, positioning Novartis to leverage Alcon's R&D engine and Novartis's global market access. The new division will be led by Kevin Buehler. The transaction is designed to maintain Novartis's double-A credit rating (currently Aa2/AA-).
Risks and Contingencies:
- Completion is conditional on SEC registration clearance and two-thirds shareholder approval from both companies.
- Forward-looking statements regarding synergies, growth, and integration are subject to risks including regulatory delays, patent litigation, and integration challenges.
- There is no guarantee that the transaction will be accretive or that the credit rating will be maintained.
Key Facts for Investor Verification
- Verify the final share exchange ratio and CVA settlement amount, which depend on Novartis's share price at closing.
- Confirm the actual execution of the USD 5 billion share buyback program to validate the "neutral to core EPS" guidance.
- Monitor the realization of the projected USD 300 million in annual cost synergies post-integration.
- Track the impact of the additional USD 2.1 billion annual amortization charge on future operating margins.
- Watch for regulatory approval timelines, as the deal is expected to close in the first half of 2011.