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Alcon: Shareholders Without Rights


Novartis is counting on Swiss law to fight minority shareholders in a takeover battle.

Novartis (NVS) shouldn't have expected Alcon's (ACL) minority shareholders to blindly accept the Big Pharma's sub-par offer for their piece of the company. Now, the Swiss drugmaker could be facing a rather pesky foe.

Alcon's minority shareholders shot back at Novartis late Wednesday, charging that the soon-to-be majority owner of the company was unfairly bending Swiss law to its advantage.

Switzerland-based Novartis announced Monday morning that it was cashing in its right to buy the remainder of Nestle's eye-care business Alcon 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. Yet, from most points of view, Novartis low-balled the shareholders that control the eye-care specialist's remaining 23% public stake, offering them only $153 per share -- a 15% discount to the Nestle price. Alcon investors are pretty outraged (considering the stock was closing above $160 just a week prior to the merger announcement).

(See, Alcon Shareholders' Short Stick in Novartis Deal.)

An independent committee of directors from Alcon fired back at the company's potential parent with reprimands: "Alcon has established certain important protections for the benefit of Alcon's minority shareholders against a coercive takeover bid and is disappointed that Novartis is attempting to circumvent those protections and corporate governance best practices."

The board went on to admonish Novartis for "claiming that the Alcon minority shareholders are neither accorded minority protections under the Swiss Takeover Code nor the rules under the NYSE."

Yet, words from an independent committee mean little to a major drug-making machine like Novartis when it clearly has the upper hand. Swiss law (both Novartis and Alcon are Swiss companies) allows Novartis to use its soon-to-be acquired majority stake of 77% to vote on the merger (this is a far cry form how minority interest transactions are handled in the US). But a slew of lawsuits or an injunction could slow the pharmaceutical company down a bit.

Lawyers are already trying to organize takeover suits that would accuse the company of violating their fiduciary duties. UBS analyst Marc Goodman noted in a report sent to investors of Alcon that "Swiss lawyers described a path for the minority shareholders to potentially hold up the deal by contesting the shareholder resolution process via injunction or creating a longer-term headache for Novartis post-merger with other lawsuits."

UBS' Goodman also downgraded Alcon to Neutral from Buy, citing valuation and the likelihood that Novartis could be willing to deal with shareholders after the deal is over. "Unclear if Novartis settles preemptively since this would be dilutive," wrote Goodman. "Novartis also gains by waiting out the minorities who contest the shareholder resolution and settling only with those parties."

After the downgrade and the announcement from shareholders, Alcon's stock continued its declines. The stock has dropped from a close of $164.35 the last trading day prior to the announcement of the Novartis takeover to linger near $153.70 on Thursday afternoon. The stock has seen a heavy trading volume this week with an average of 13 million shares traded on Monday and volumes over 1.5 million shares (more than twice the usual volume) on each of the other days.
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