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 May
2008 issue
Merger Magic
Returns--
Four Billion-Dollar Deals Jumpstart April’s M&A Market
April saw the announcement of four
billion-dollar deals in the health care technology sectors worth a combined
total of $50.9 billion.
Even if these four mega-deals are ignored, the health care M&A market,
particularly the middle market segment, continues to offer investors good
opportunities.
...
With An Eye On The Future--
Novartis Buys Alcon, Builds Eye Care In $39.0 Billion Deal
Novartis struck a two-part deal with Nestle to acquire a majority of eye
care giant Alcon for $39.0 billion. This constitutes the largest Medical
Device deal ever announced.
...
In the Departments
Services
-Health Care Services
-Deal Summaries
-Additional Transactions
-Transaction Updates
Technology
-Health Care Technology
-Deal Summaries
-Additional Transactions
-Transaction Updates
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Articles Archive
Companies Mentioned in this issue:
May 2008
A
Abbott Laboratories p10
Abraaj Capital p4
Accelerated Rehabilitation Centers p7
Accuro Healthcare Solutions p15
Agensys p10
Al Borg Laboratory p4
Alcon, Inc. p1
Alnylam Pharmaceuticals p10
Apax Partners, L.P. p10
Astellas Pharma p10
B
Banc of America Securities Canada Co. p16
Bank of America Corp. p16
Blackstone p8
BlueCross BlueShield of Tennessee p15
Brookwood Medical Center p4
C
Cain Brothers and Company p15
Capella Healthcare p3
Carolina Care Plan p4
Center for Behavioral Health p3
Centerstone p3
Children’s Heart Center p4
Chiron p9
Chiropractic Alliance Corporation of Tampa p4
Church & Dwight Co. p16
Citi p15
Community Health Systems p3
Coty p16
Cowen and Company p16
Culpeper Medical Associates p3
Culpeper Regional Hospital p3
D
Del Laboratories p16
Del Pharmaceuticals p16
Deutsche Bank Securities p15
Diagna Radiology p4
Draxis Health p16
E
Eisai Co. p10
Empire Health System p3
EP MedSystems p16
eScription p15
Europa Apotheek p8
F
Forticell Bioscience p16
Fulcrum Ventures p3
G
Gemino Healthcare Finance p3
Gerber p1
GlaxoSmithKline p10
Goldman, Sachs & Co. p10
Goldman Sachs Urban Investment Group p7
Gryphon Investors p7
GTCR Golder Rauner, LLC p3
H
Haas Wheat & Partners p7
Harpeth Companies, LLC p3
Harris William & Co. p7
Health Management Associates p3
HealthSouth Corp. p7
HomeChoice Health Services p3
Houlihan Lokey p7
I
Isis Pharmaceuticals p10
Ista Pharmaceuticals p16
J
J.P. Morgan Chase & Co. p16
JP Morgan Securities p16
Jubilant Organosys p16
K
Kelso & Co. p16
Kinetic Concepts p15
L
Lazard p16
Lehman Brothers p15
LifeCell Corporation p15
M
MedAssets p15
Medco Health Solutions p8
Medical Mutual of Ohio p4
Mediplex/Cumberland Rehabilitation, LP. p7
Merck p9
Merrill Lynch & Co. p16
MGI Pharma p10
Millennium Pharmaceuticals p10
Morgan Stanley p8
N
Nestle SA p1
Norris Cancer Hospital p3
Norwood Clinic p4
Novant Health p3
Novartis AG p1
Nuance Communications p15
Nursefinders p7
O
OccuSport Physical Therapy p7
P
Palmetto Health p4
Pediatrix Medical Group p4
Pharos Capital Group, LLC p7
Physicians Medical Center Carraway p4
Premier Health Systems p4
Prism Health Networks p4
Prudential Capital p3
Q
Quinco Behavioral Health Systems p3
R
RBC Capital Markets p14
Regulus Therapeutics p10
Resources On Call p7
S
Sandpiper Bay p4
SIA International Ltd. p7
Sirtis Pharmaceuticals p16
Sisters of Charity Providence Hospitals p4
Skilled Healthcare Group p4
SSM Health Care p4
St. Francis Hospital p4
St. Jude Medical p16
Summer Street Capital Partners, LLC p4
SunCrest Healthcare p3
T
Takeda Pharmaceutical Co. p10
TAP p10
Tenet Healthcare Corp. p3
The Regence Group p15
The Rehabilitation Hospital of South Jersey p7
The TriZetto Group p10
TPG Capital p7
TPMS p15
U
UBS Investment Bank p10, p15
University of Southern California p3
University of Virginia Medical Center p3
USC University Hospital p3
V
Virtual Radiologic Corp. p4
W
Warburg Pincus p15
Waterfront Inn p4
Welsh, Carson, Anderson & Stowe p15
William Blair & Co. p15
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With An Eye On The Future--
Novartis Buys Alcon, Builds Eye Care In
$39.0 Billion Deal
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article to a friend
Email Editor
April
saw the announcement of the largest Medical Device deal ever recorded.
This deal boils down in effect to the adage that it is unwise to put all
of one’s eggs in the same basket.
Nestle SA
(VX: NESN) entered into a deal with Novartis AG
(NYSE: NVS) to sell its 77% interest in medical device company Alcon,
Inc. (NYSE: ACL) for $39.0 billion. It’s a deal that has been in
discussion for some time now, and it’s not the only one that the two
companies have struck up. Last year, Nestle bought NVS’ Gerber baby
foods unit for approximately $8.0 billion.
Incorporated in Switzerland, with
U.S. headquarters in Fort Worth, Texas, Alcon develops, manufactures and
markets drugs, devices and products to treat eye diseases and disorders.
ACL operates three divisions: surgical, pharmaceutical and consumer vision
care. The company is a world leader in the cataract surgery market: it
manufactures cataract, vitreoretinal and refractive systems, devices,
surgical packs and solutions. Its pharmaceuticals unit embraces both
prescription and OTC drugs, focusing on glaucoma and macular degeneration,
as well as eye infections, inflammations and allergies. And its consumer
vision care division offers such products as contact lens solution and
ocular vitamins. It is not just the diversity of business lines that makes
ACL attractive, but the diversity of revenue sources. The company is not
hamstrung by having all its revenue come from one geographic source or
from one kind of customer, such as managed care organizations. In the
areas of laser surgery and consumer health, ACL derives revenue from
private pay customers. It is regarded as the world’s largest and most
profitable eye care company. On a trailing 12-month basis, ACL generated
revenue of $5.6 billion, EBITDA of $2.0 billion and net income of $1.6
billion. For 2007, the surgical division posted $2.5 billion in revenue;
the pharmaceutical division, $2.3 billion; and the consumer health
division, $800.0 million.
Under terms of the deal,
Novartis is to pay Nestle $11.0 billion for its initial 25% stake. In this
first tranche, NVS is paying $143.18 per share. The deal also gives NVS
the exclusive right to buy NESN’s additional 52% stake for $28.0 billion
between January 2010 and July 2011. In the second tranche, NVS has agreed
to pay $181.00 per share. The first tranche thus represents a 3.5%
discount to Alcon’s current price; the second tranche, a 22% premium. The
price to be paid represents an implied purchase price of $52.0 billion for
a 100% interest in ACL, along with a price to revenue multiple of 9.3x and
a price to EBITDA multiple of 26.0x. Under the actual price of $39.0
billion stipulated in the deal, however, the P/R multiple is 7.0x and the
P/EBITDA multiple is 19.5x.
What has Alcon got that
would prompt Novartis to take the risk of paying out $11.0 billion now for
a 25% minority stake and waiting up to three years before it drops the
other $28.0 billion shoe? The acquisition of ACL will help NVS spread risk
from its core pharma business, which is facing generic competition now and
in the foreseeable future. Recognizing this, NVS has been diversifying
away from the novel blockbuster drug by branching into generics with its
Sandoz unit and into vaccines with its 2006 acquisition of
Chiron. R&D for new drugs is becoming more expensive; government
approval for drug candidates, more onerous. Like other major pharma
players, NVS has had its share of setbacks. At the request of the FDA, the
company withdrew its irritable bowel syndrome drug Zelnorm because
of increased risk of heart attacks. Approval of the company’s new diabetes
drug Galvus has been delayed. Its Prexige painkiller, once
hailed as an up-and-coming blockbuster, is unlikely to receive FDA
approval since it belongs to the same COX-2 class of drugs as Merck’s
(NYSE: MCK) ill-fated Vioxx. Finally, Diovan, NVS’ top
selling blood pressure medication, which brings in $5.0 billion annually,
faces U.S. patent expiration in 2012. These risks are reflected in the
fact that while ACL currently boasts an EBITDA margin of 36%, NVS gets by
with 26%.
Nor is NVS a novice to eye
care; the acquisition of ACL will complement the company’s existing
Ciba Vision unit. Adding ACL’s revenue to Ciba’s annual take of
$2.5 billion will create an eye care unit that has pro forma revenue of
$8.1 billion.
What about the risk to
Novartis of tying up company resources, especially financial ones, for up
to three years? While the second tranche is technically "optional," both
companies would have to agree not to exercise their rights for the deal to
fall through. Nestle can force through the purchase of the second tranche
while NVS can opt out if there is a material change in the business. But
at this juncture, Novartis wants to see the second phase completed because
it gains no long-term advantage by owning just a 25% stake in ACL. And
Nestle certainly wants to see the deal through to the end because it would
help reduce debt, streamline the worlds’ largest food group and equip its
war chest for future acquisitions with a considerable punch.
NVS is to finance the first
tranche from its cash reserves and external short-term financing. The
second tranche would be financed from cash and further borrowing. As a
historical footnote, Nestle acquired its stake in ACL in 1978 for just
$275.0 million, so the company is yodeling all the way to the bank.
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