After approximately a year of circling each other and jockeying for position, Novartis (NOVN) and Alcon (ACL) have finally reached a mutually acceptable buyout price for the remaining 23% of Alcon that has been in the hands of minority shareholders. We will raise our fair value estimate for Alcon to match the new offer of $168 per share, which comprises 2.8 shares of Novartis and a contingent value amount in cash to lock in the $168 price if Novartis' shares trade above or below $60 at the close of the deal. The revised offer is modestly higher than the original $153 offer last January and on par with the average $168 price paid for Nestle's (NESN) entire Alcon stake. The revised offer is considerably higher than what Alcon is worth as a stand-alone entity. We think Alcon shareholders are getting a good deal, especially because Novartis shares remain undervalued and hold upside potential, in our view. It is unlikely that Alcon's independent directors could have changed the final outcome and prevented Novartis from purchasing full control of Alcon, but they could have dragged out the process. The new offer price is a graceful way for minority Alcon shareholders to halt their resistance to the buyout and move the process along in a timely manner.
We don't expect any major changes to our fair value estimate for Novartis based on the finalised purchase price of Alcon, which was close to our expectations. Also, we don't expect any significant changes to our AA+ credit rating based on completion of the deal and the announced CHF 10 billion share-buyback programme, as Novartis stated it will only repurchase shares to the point where it can maintain its double A credit rating. However, we expect Novartis' plans to repurchase shares in tandem with the completion of the Alcon acquisition will increase our 2011 earnings per share estimate by close to 4%, to $5.40, up 2% year over year. More important, over the long run, we expect the acquisition will give Novartis increased exposure to the quickly growing eye-care business (second only to oncology drug growth over the past five years).
Debbie S. Wang is an Equity Analyst with Morningstar. Senior Equity Analyst Damien Conover, CFA, contributed to this note.
