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Alcon Shareholders' Short Stick in Novartis Deal


Deal creates a Swiss eye-care giant, but blinds some investors.

The new year has barely begun and already a pharmaceutical deal is underway that overall trumps some of 2009's biggest deals.

(NVS) announced Monday morning that it was cashing in its right to buy the remainder of Nestle's eye-care business Alcon (ACL) it didn't already own. And it threw a merger proposal on the table for the minority public stake that could bring the deal's total value to $49.7 billion once all is said and done. (See, What the Top Ten 2009 Pharma Deals Say About 2010.)

The deal, which includes the 25% stake that Novartis bought in April 2008 for $10.4 billion, or $143 per share, allows the Swiss pharma giant to easily snag Nestle's remaining 52% stake of Alcon for another $28.1 billion, or $180 per share. This move comes as no surprise to anyone -- Novartis was given the option to acquire the rest of Nestle's share of Alcon any time between January 2010 and July 2011. Investors were tipped off that the Swiss pharma was ready to pounce early when it converted its financial reporting system at the end of last year to exclude non-cash charges like M&A activity.

But the major shocker is Novartis's willingness to put a deal on the table for the 23% minority public share of Alcon, which the pharmaceutical company had said it wasn't all that interested in. And from most points of view, the offer -- at only $153 per share and a 15% discount to the Nestle offer -- is nothing short of offensive to Alcon shareholders.

Normally, investors would assume the $153 per share offer was just a jumping-off point and that negotiations will lead to a better deal for them, but Novartis has some tricky merger laws on its side that will allow it to by-pass negations altogether.

Once Novartis is the majority stakeholder of the world's leading eye-care company, with 77% ownership of the company, it can effectively force the acquisition of the minority stake at whatever price it wants. Swiss law (both Novartis and Alcon are Swiss companies) allows Novartis to use its new majority stake to vote on the merger (this is a far cry form how minority interest transactions are handled in the US.).

So, Alcon investors should be pretty outraged (considering the stock was closing above $160 just a week prior to today's announcement), but what should Novartis shareholder's do?
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No positions in stocks mentioned.

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