Eye For Business

Novartis and Nestlé have signed a deal through which Novartis will buy just less than 25% of Nestlé's Alcon eye care business and have the option to purchase another 52% by 2011. When completed, the deal between the Swiss companies will total $39 billion.

Alcon makes and sells pharmaceutical, surgical, and consumer eye care products. In 2007, it derived $1.6 billion in net income from sales of $5.6 billion, of which about 40% were in the pharmaceutical area.

"This acquisition furthers our strategy of accessing high-growth segments of the health care market while balancing inherent risks," says Novartis CEO Daniel Vasella. The two companies have complementary product offerings in the eye care area and together will control 37% of the market.

The companies have structured the deal in two steps to accommodate the desires of Nestlé. Novartis will pay $11 billion for an initial stake in Alcon in the second half of 2008. Between January 2010 and July 2011, Novartis has the exclusive right to purchase another 52% at a fixed price and eventually own 77%; minority shareholders will own the remaining 23% of the company.

During a conference call with Novartis executives, financial analysts questioned the rationale behind the deal. Although the Alcon business is profitable and has been growing at double-digit rates, the two-step deal will not allow Novartis to realize any cost savings in the short term as a minority shareholder. The company may also not realize any long-term benefits unless it buys out the minority shareholders. Meanwhile, the company is taking on about $5.5 billion in debt to finance the deal.

On Monday, April 7, when the deal was announced, Nestlé's stock price rose while that for Novartis dropped slightly. Regulators must still approve the deal.