Magazine article Global Finance

Strategic Acquisitions Still Getting Done

Magazine article Global Finance

Strategic Acquisitions Still Getting Done

Article excerpt

With the credit crunch putting a damper on private equity deals, mergers and acquisitions have declined, but companies are still willing to dip into cash reserves and even borrow significant amounts of money to finance strategic takeovers that promise to boost earnings growth.

Novartis, one of Switzerland's largest drug makers, agreed last month to spend $39 billion on a two-step purchase of Alcon, the world's largest and most profitable eye-care company.

"Eye care will continue to grow dynamically, as there is a growing unmet medical need, driven primarily by the world's aging population," says Daniel Vasella, chief executive of Basel-based Novartis. "The margins are higher than our pharma business and are obviously very attractive," he says.

The Alcon purchase also complements Novartis's Ciba Vision business and its Lucentis drug for treating macular degeneration in the elderly, a condition in which the inner lining of the eye thins, which can cause loss of central vision.

Novartis will initially pay Vevey, Switzerland-based food company Nestlé $11 billion for a 25% share of Alcon, which makes Opti-Free contact lens solution andTravatan glaucoma medicine, as well as surgical equipment and implantable lenses. Novartis also will have the exclusive right to buy Nestlé's remaining 52% holding in Alcon for about $28 billion between January 2010 and July 2011.

Novartis will finance the first step of the deal by issuing $5.5 billion of debt, temporarily suspending its share-buyback program and using cash reserves. Credit Suisse advised Nestlé on the sale, and Goldman Sachs advised Novartis on what will be one of the largest M&A deals ever in Switzerland.

Novartis lost its AAA rating at Moody s Investors Service and Standard & Poor's as a result of its agreeing to use debt to fund the Alcon purchase. S&P credit analyst Olaf Toelke, based in Frankfurt, says the debt will lead to significantly increased leverage at Novartis. …

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