Drug maker Novartis AG made a bid to become a leading player in the growing global market for eye-care products Monday with an announcement that it plans to take over Alcon Inc. by paying $38.5 billion for the 77 percent stake it does not already own.
Novartis will buy Nestle SA's 52 percent stake for $28 billion in cash before carrying out a merger with Alcon that would give it control of the remaining 23 percent held by minority shareholders.
The Basel-based drug maker had already purchased 25 percent of Alcon from Nestle in April 2008 for $11 billion, with the option of buying the food and drinks company's remaining stake at a later date.
Novartis will finance the deal using a combination of cash reserves, loans of up to $16 billion, and by issuing 98 million new shares in its own stock — a move that will require approval at a shareholders meeting.
If successful, the takeover will have cost about $50 billion in all, making it the biggest in Swiss corporate history.
"This is the right time to simplify Alcon's ownership to eliminate uncertainties for employees and shareholders," said Novartis chairman and chief executive Daniel Vasella.
"It will also allow us to strengthen innovation power by combining R&D efforts and grow our global market presence thanks to our complementary product portfolios," he said in a statement.
Vasella told reporters in a conference call Monday that the takeover represents a "great strategic fit."
Novartis said Alcon's portfolio of artificial lens implants, specialty medicines for glaucoma, infections and allergies, as well as over-the-counter eye drops and vitamins would help it create a separate eye-care division. The Swiss pharmaceutical company already has a number of eye-care products that include the Ciba Vision brand of contact lenses.
The world market for eye-care products is seen as growing, as populations age in developed countries and as people in poorer countries get more access to products such as contact lenses.
Novartis shares closed down 2.6 percent at 55.05 Swiss francs ($53.49) on the Zurich exchange.
Under the terms of the merger proposal, minority shareholders would receive 2.8 Novartis shares for each Alcon share. Based on the Novartis share price and exchange rates prior to the announcement, this would value each publicly traded share of Alcon at approximately $153, Alcon said.
Analysts at Zuercher Kantonalbank welcomed the announcement, but said Novartis might have to raise its offer to win over Alcon minority shareholders as the offer is considerably lower than the $180 per share it will offer in order to win Nestle's controlling 52 percent.
Asked about the offer to Alcon shareholders, Novartis spokesman Eric Althoff referred to the Swiss company's statement that the proposal represents a 12 percent premium on what it consider the unaffected Alcon share price of $137. Rumors of an imminent offer have since driven up the price of Alcon shares.
Analyst Tim Anderson of Sanford C. Bernstein said Novartis may have the upper hand in a struggle with minority shareholders, as Swiss merger law requires only a simple majority of Alcon board votes and two-thirds of shareholders to support the deal.
Alcon said a committee composed of its three independent board members has engaged financial and legal counsel to evaluate the proposed merger. The deal also requires regulatory approval.
Alcon is based in Huenenberg, Switzerland, and has its U.S. headquarters in Fort Worth, Texas. The company employs some 15,000 people worldwide and specializes in surgical equipment and devices, contacts lens solutions and other consumer eye-care products. It posted a net profit of $515 million, or $1.71 per share, in the third quarter.
Combined, Novartis hopes to reach 70 percent of the $26-billion global market for eye-care products and generate annual sales of $8.5 billion, according chief financial officer Raymund Breu.
Chief executive Vasella said Novartis would save an additional $100 million on top of $200 million savings it had already predicted within three years of the merger. Novartis doesn't plan to cut any jobs, Vasella said.
Nestle purchased Alcon in 1977 for $280 million. In total, the Vevey-based company has earned over $40 billion from the sale of Alcon.
In a separate announcement Monday, Nestle said it would buy back about 10 billion francs ($9.67 billion) of its own stock over the coming two years. This comes on top of 5 billion francs outstanding from a previous share buy-back program.
Nestle shares traded 1.5 percent higher at 50.95 francs ($49.50) on Monday.