Nestlé expected to “deleverage” as a result of Alcon sale

Posted by Daniel Palmer on 5th January 2010

Proceeds from the sale of Nestlé’s remaining stake in Alcon to health-care giant Novartis are likely to be used for deleveraging, according to an industry analyst.

The Swiss food giant announced overnight (Australian time) that pharmaceuticals group Novartis had exercised its call option to buy a 52% stake in Alcon for around US$28bn in cash.

Novartis bought 25% of Alcon in April 2008 for $10.4bn and plans to buy the remaining 23% of the business, offering investors a 12% premium if they agree to exchange their Alcon shares for Novartis ones. The move will cost around $11.2bn.

Nestlé also announced its intention to launch an additional share buy-back programme of CHF10bn (US$9.67bn) this morning, which will start in 2010 for two years, once the existing programme of CHF25bn has been completed.

However, with the disposal largely expected by most investors, Sanford Bernstein analyst Andrew Wood said the bigger question was what Nestlé is likely to do with the cash.

“With our estimate of CHF17bn of net debt at year-end 2009, full deleverage is likely…hardly an efficient balance sheet. Ongoing buybacks and continued small M&A should eat up all of the CHF4-5bn of post-dividend FCF per year, and also lead to some slow increase in leverage…but Nestlé’s balance sheet is likely to remain inefficient for some time,” Wood said.

Nonetheless, Wood said that the sale has extracted “significant” value for its shareholders and the only surprise was that Novartis exercised its call before Nestlé had time to exercise its put.

“With Alcon trading well above $151 (it was at $164 on 31 December), it made no sense for Nestlé to delay exercising the put beyond the earliest possible date in 2010. Novartis’ decision to exercise probably has to do with its strategy of bidding for the remaining 23% of the shares outstanding,” Wood said.

He added: “By selling 25% in 2008 for $143 per share, and the remaining 52% in 2010 for $181 per share, we believe Nestlé should in fact be congratulated for a disposal process that has been well managed, and has extracted significant value for its shareholders.”

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