Business Context and Reporting Period
This Form 6-K filing by Novartis AG, dated August 26, 2010, announces the completion of the acquisition of a 77% majority stake in Alcon, Inc. from Nestlé. This transaction adds a leading eye care platform to Novartis's existing portfolio of Pharmaceuticals, Generics, Vaccines, Diagnostics, and Consumer Health. Alcon will now be fully consolidated into Novartis's financial reports.
Key Financial Metrics and Transaction Details
- Transaction Value: The total cost for the 77% majority stake is USD 38.7 billion (USD 168 per share). This includes a prior 25% stake purchased in July 2008 for USD 10.4 billion and the remaining 52% acquired in this transaction for USD 28.3 billion.
- Alcon 2009 Performance: Alcon reported 2009 annual sales of USD 6.5 billion, operating income of USD 2.3 billion, and net income of USD 2.0 billion.
- Novartis 2009 Performance: Novartis Group continuing operations achieved net sales of USD 44.3 billion in 2009, with approximately USD 7.5 billion invested in R&D.
- Financing Structure: The transaction was funded with USD 17.0 billion in available cash, USD 13.5 billion from bonds raised in 2008, 2009, and March 2010, and USD 8.2 billion in US commercial paper issued in 2010. All-in external financing costs are 2.5% per year.
- Projected Synergies: Potential annual pre-tax cost synergies are estimated at approximately USD 200 million.
Material Changes and Accounting Implications
With the acquisition, Alcon is fully consolidated into Novartis's financial statements. Preliminary accounting assessments for the 2010 year-end include:
- Revaluation Gain: An estimated USD 200 million gain in 2010 from revaluing the initial 25% stake to its deemed fair value.
- Amortization: An estimated additional pre-tax amortization of intangible assets of approximately USD 2.1 billion per year. The estimate for the balance of the four months of 2010 is USD 400 million, including inventory step-up.
- One-Time Costs: Approximately USD 140 million in one-time costs to achieve synergies over the next three years, plus approximately USD 140 million in other 2010 charges (transaction expenses and other charges).
- Divestments: Regulatory decisions may require divestments with 2009 sales of approximately USD 100 million.
Guidance, Outlook, and Risks
Earnings Outlook: The acquisition is expected to be broadly neutral to reported earnings per share (EPS) in 2010 and 2011. However, it is projected to show low single-digit accretion to core EPS in 2010 and high single-digit accretion in 2011. On a fully synergized basis, EPS accretion in 2011 is expected to be around low double digits.
Future Strategy: Novartis has proposed a direct merger to acquire the remaining 23% of Alcon held by minority shareholders at a fixed exchange ratio of 2.8 Novartis shares for each Alcon share. Strategic opportunities include collaborations on Lucentis for Diabetic Macular Edema, joint sourcing, and manufacturing optimization.
Risks and Contingencies: The filing includes standard forward-looking statement disclaimers. Risks include the ability to realize synergies, regulatory approvals for the proposed merger, integration disruptions, litigation (including product liability and sales practices), patent protection uncertainties, and global economic conditions.
Investor Verification Checklist
- Verify the final accounting treatment of the USD 2.1 billion annual amortization and its impact on future margins.
- Confirm the timeline and regulatory approval status for the proposed merger to acquire the remaining 23% of Alcon.
- Monitor the realization of the projected USD 200 million in annual pre-tax cost synergies.
- Assess the impact of required regulatory divestments (approx. USD 100 million in 2009 sales) on the combined entity's revenue.
- Review the actual EPS accretion in 2010 and 2011 against the "broadly neutral" reported EPS and "low single-digit" core EPS guidance.