News of Novartis AG buying Alcon Inc. from Nestle SA brings several thoughts to mind. The first, noted in Andrew Bulkeley's
article in The Deal, is that the $11 billion in cash Nestle will reap in the first step of the deal is more than enough to pay for the Mead Johnson division of Bristol-Myers Squibb Co., which is under strategic review and thought to be worth $7 billion to $9 billion. Along with Groupe Danone SA, Kraft Foods Inc., PepsiCo Inc. and H.J. Heinz Co., Nestle is one of the logical bidders for the maker of infant formula. And Nestle said it may use the proceeds from the Alcon deal for another acquisition in the health and wellness arena.
The second is to note the huge amount of strategic dealmaking we're seeing as diversified healthcare companies and the food giants figure out what they want to focus on and redraw the boundaries between their businesses. It was just a year ago that Novartis
sold its Gerber baby food business to Nestle for $5.5 billion, having earlier sold Nestle its Novartis Medical Nutrition unit for $2.5 billion. In July, Danone
agreed to buy Royal Numico NV, a maker of baby food and nutritional products, for $16.8 billion.
Finally there's the two-step nature of the Alcon acquisition. Why two steps? Maybe for financial reasons. Novartis will use cash reserves and short-term borrowing to fund the purchase of the initial 25% stake, and warned of a ratings downgrade as a result. Paying the full $39 billion purchase price all at once would presumably have been a strain for Novartis.
Interestingly, the purchase structure -- which features both a call for Novartis and a put for Nestle for the next 52% of Alcon -- was suggested by Nestle and agreed to by Novartis, according to this
Dow Jones article.
It's a structure that was probably made more comfortable for both sides by the fact that these two Swiss companies know each other well. It also provides a way for Nestle to efficiently harvest a big chunk of cash that it may want to put to work fairly soon. -
Kenneth Klee
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