Novartis Leaves Door Open to Higher Offer for Alcon

Novartis AG (NOVN) Chief Executive Officer Joe Jimenez left open the possibility the Swiss drugmaker may raise its $9.8 billion offer to buy out eye-care company Alcon Inc.’s minority shareholders.

Novartis will negotiate with Alcon’s board as planned after the acquisition of Nestle SA’s (NESN) 52 percent stake in Alcon is complete, Jimenez said. Novartis in January exercised an option to buy Nestle’s shares for an average of $180 each in cash, and offered to purchase stock held by the public at a lower price.

“We can’t speculate on what will happen in the future,” Jimenez, 50, said in an interview at Novartis’s Basel, Switzerland, headquarters. “We believe that we have offered a fair price and a full price, but I wouldn’t say one way or the other” whether Novartis will raise the offer, he said.

A higher bid would reward some of the world’s biggest hedge funds, such as SAC Capital Advisors LP and York Capital Management, which bought Alcon shares after Novartis’s Jan. 4 offer. At least a half dozen of the top 20 outside investors in Alcon bought all their stock since the deal was announced, according to data compiled by Bloomberg, implying they expect a higher offer.

Novartis has said Nestle deserves a premium price for its controlling stake in Alcon. A committee of independent Alcon directors said the bid for the publicly held shares is “grossly inadequate,” and Novartis is using “coercive tactics” to force the deal through. The committee set up a $50 million trust to pay for possible lawsuits over the offer.

Novartis Offer

Novartis offered to pay 2.8 of its own shares for each Alcon share traded on the New York Stock Exchange. The drugmaker says this is fair because at the time of the offer it represented a 12 percent premium to Alcon’s “unaffected price” -- meant to strip out a stock gain linked to expectations of a Novartis bid -- of $137.

The offer to Alcon’s public shareholders is now valued at about $141.99 a share, based on today’s closing price for Novartis and the Swiss franc’s exchange rate with the dollar. Alcon rose $3.81, or 2.4 percent, to $160 at 4:01 p.m. in New York. The stock has traded higher than the value of the Novartis bid every day since the offer was announced. Novartis dropped 35 centimes, or 0.7 percent, to 52.65 francs at the 5:30 p.m. close of trading in Zurich today. The stock has fallen 6.8 percent this year.

SAC Capital

SAC Capital, the hedge-fund company founded by Steven A. Cohen, bought 2 million of its 2.5 million Alcon shares in the first quarter. York Capital, Franklin Resources Inc., Gruss Asset Management LP, Mason Capital Management, Eton Park Capital Management and Canyon Capital Advisors LLC bought all their shares after the announcement. The firms declined to comment or didn’t return calls.

Novartis, which already owns 25 percent of Huenenberg, Switzerland-based Alcon, expects to complete its purchase of Nestle’s stake for $28.1 billion late in the third quarter or in the fourth quarter, Jimenez said. The purchase of the minority stake is conditional on the completion of the Nestle deal and the approval of the Novartis and Alcon boards, as well as backing from two-thirds of each company’s shareholders.

Jimenez declined to comment on when he expects Novartis to take full control of Alcon.

“We’ve never said when the minority stake would be closed because there obviously has to be a negotiation process that takes place with the Alcon board,” he said. Novartis can effectively force Alcon’s approval of the deal because it will control six of the 11 seats on the Alcon board and 77 percent of the eye-care company’s shares after buying the Nestle stake.

‘Very Full Price’

Alcon shareholders today voted at a special meeting in Zug, Switzerland, to elect five directors nominated by Novartis to replace those who represent Nestle. The new directors will join the board after Novartis acquires the Nestle shares. Novartis Chairman Daniel Vasella will retain his seat on the Alcon board.

“Under Swiss merger law the offer that is made has to be fair to both sides, so it has to be fair both to the Alcon minority shareholders and it has to be fair to Novartis shareholders,” Jimenez said in the Aug. 12 interview. “That’s the other thing people miss, is that we’re paying a very full price for Alcon.”

Alcon created a committee of three independent directors in December 2008 to protect minority investors in transactions involving major shareholders. Novartis says its board nominees can vote in favor of the proposed acquisition of the publicly traded shares, a claim the committee disputes. Jimenez declined to say whether Novartis has held talks with the independent directors. Thomas Plaskett, chairman of the committee, said there may be “hope” of coming to an agreement with Novartis.

Signals

“Based on some of the signals that seem to be out there in the last few days perhaps there is hope of arriving at an agreed transaction,” Plaskett said in an interview at Alcon’s extraordinary general meeting in Zug, Switzerland.

“At the end of the day, Novartis has overpaid for Alcon and they’re now trying to play hardball,” Dominic Valder, an analyst at Evolution Securities in London, said in an interview Aug. 13. “It looks clear from Alcon’s articles of association that conflicted directors are not allowed to vote on the deal. I’m assuming they’ll have to bump up the offer by about 10 percent.”

The U.S. may grant antitrust approval “shortly” to acquire Nestle’s stake, Jimenez said.

Novartis is seeking to expand its share of the ophthalmology market and to diversify beyond drugs through its purchase of Alcon, the maker of Opti-Free contact lens cleaners, surgical equipment and drugs for the eye and ear.

After buying Alcon, Novartis doesn’t expect to make any large acquisitions in the near future, Jimenez said.

“What you will see is bolt-on acquisitions that will help us build scale of our non-pharma businesses,” he said. “That’s either generics or vaccines or over-the-counter drugs or, now, eye care. Even within pharma, if there are good pipelines to go after and good compounds that we want, then you’ll see us participate there.”

To contact the reporter on this story: Dermot Doherty in Geneva at ddoherty9@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.