Alcon Outrage at Novartis' Bullying

Far from achieving "clarity" in its Alcon takeover by bidding for the minority shareholders' 23% stake as well as buying up Nestlé's majority ownership, Novartis has apparently whipped up a storm of anger among Alcon's independent directors and shareholders. That may turn into a legal battle unless the Swiss group ups its offer.

Earlier this week Alcon's Independent Directors' Committee launched a new website dedicated to explaining why, in their view, Novartis' offer of about $150/share for their stake is "grossly inadequate". (Don't forget they paid about $180/share in cash to Nestlé for the latest, 52% tranche of the food-group's stake.) Not only that, but the Swiss Big Pharma's "coercive" tactics, they go on to declare angrily, are "offensive".

The bit we liked best on the IDC call Wednesday was Chairman Thomas Plaskett's likening Novartis to "a playground bully who takes half your lunch money then splits it with his best buddy."

This is more than lunch money, mind. Even at the current offer level, Novartis will be forking out an additional $11.2 billion for the minority stake in Alcon, on top of the $38.5 billion it's already paying Nestlé. Creating a global eye-care leader is pricey, notwithstanding the strategic benefits of this white hot specialist space.

But Alcon's worth more still--"dramatically" more, cry the minority shareholders. They declare Novartis' valuation of the business as "fundamentally flawed", dismissing the Big Pharma's $137 estimate of Alcon's 'unaffected' share price (had there not been months of deal-related speculation). (Read the minority's financial analysis here.)

What hasn't helped relations is that Novartis' management claim they can simply force the shareholders to accept their offer, according to Swiss merger law (that's the playground bully bit). "We will have 77% of shares on closing the deal with Nestlé, which gives us a majority on the board, so we can vote in favor of our further proposal," argued Chairman and CEO Dan Vasella on a Jan 4 conference call announcing the deal. The only recourse open to minority shareholders would be an appeal to a Swiss court post-completion, he later clarified.

Not so, say the shareholders, and we'll direct you to that highly informative website for the legal small print.

So, posturing aside, how much are these shareholders after? Plaskett wouldn't give a number during the call (he doesn't want to scupper their negotiating position). But your blogger persuaded another shareholder to stick his neck out. "Between $175 and $180 is probably the lowest I'd be willing to accept."

That's probably optimistic; don't forget the blended per-share price Nestlé's getting is $168 (taking into account both price of the original 25% stake plus that of the more recent 52% stake). But the message it sends is clear: come up with a better offer, or we'll drag this out as long as we can, through the law courts.

Novartis may be the Goliath in this story, but it's got lots to lose from a protracted legal battle, whatever the final outcome. Many of Alcon's minority shareholders are its employees, which Novartis won't want to lose (it's probably already annoyed a fair few of them). Indeed, the idea is to have Alcon's management run a new, larger ophthalmology company comprising Alcon and Novartis' eye-related assets. Nor will a long court-room fight help Novartis extract its estimated (some say under-estimated) $300 million in cost-synergies or provide the focus that such an integration will require.

Novartis wouldn't comment yesterday on the IDC's reaction to its offer. But we reckon there's a better-than-average chance that they'll try to resolve this in a friendly, non-bullying fashion. Or at least an average chance (given that Novartis has doubtless tied up the best law firms).

We'll certainly be listening with interest to Jan 26's results call; you never know.

image by flikrer trixOr used under a creative commons license