Novartis (NVS) has recently announced that it intends to gain full ownership of eye care company Alcon Inc. (ACL). Novartis will first complete its April 2008 agreement with Nestlé S.A. whereby it will acquire a majority stake (77%) in Alcon. Of this, Novartis acquired a 25% stake in Alcon in 2008 for $10.4 billion.

Novartis will be paying $28.1 billion for Nestlé’s remaining 52% stake in Alcon. Once this deal is completed in the second half of the year, Novartis is planning to acquire the remaining 23% minority stake in Alcon. Each Alcon share will receive 2.8 shares of Novartis.

Novartis intends to fund its acquisition of the 52% stake in Alcon through available funds and external financing. Novartis’ outlay for acquiring a 77% stake in Alcon comes to about $38.5 billion.

With both Alcon and Novartis possessing complementary eye care product portfolios, this deal should allow them to strengthen their position in the eye care market. Moreover, this deal should help Novartis compensate for the loss of revenues once several of its products start facing generic competition. The eye care market presents significant growth potential, thanks to the unmet needs of the aging population.

With a 77% majority stake, Novartis expects to achieve approximately pre-tax cost synergies of about $200 million annually within three years after closing. The company expects to enjoy an additional $100 million in annual pre-tax cost synergies once the merger is completed.

The merger is conditional on Novartis’ acquisition of the 52% stake from Nestlé and the approval of the Boards of Directors of both Novartis and Alcon. The merger also needs to be approved by two-thirds of the shareholders of Novartis and Alcon. Once the merger is completed, Novartis’ eye care segment will consist of Alcon, CIBA Vision and select eye care medicines.

We currently have a Neutral recommendation on Alcon. We believe the company’s business model remains fundamentally strong. Alcon has also done an excellent job with cost control, which should continue to benefit operating margins. Meanwhile, continued international penetration, new product launches and market share gains will be the fuel for future revenue growth at Alcon.

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