Swiss drug giant Novartis has reached an agreement with global foods leader Nestlé SA to acquire up to 77-per cent of its shareholding in the world's largest eye care company Alcon in a two-stage transaction, subject to regulatory approvals.

In the first step, expected to be completed in the second half of 2008, Novartis will acquire a minority 25-per cent stake in Alcon for about $11 billion for $143.18, which is Alcon's volume-weighted average share price between 7 January 2008, and April 4, 2008. Alcon's closing share price was $148.44 on 4 April, the last trading day before the signing of this agreement.

Nestle and Novartis also announced that the agreement for the second stage of the transaction contains put and call option rights on the remaining Alcon shares owned by Nestle under which Novartis has a call option to buy Nestle's remaining Alcon shares at a fixed price of $181 per share.

Nestle has a put option to sell its remaining Alcon shares to Novartis at the lower of Novartis's call price of $181 per share or at a 20.5 per cent premium above the market price of Alcon shares, which will be calculated as the average price of Alcon shares during the week preceding the exercise date of the put option.

While the second step is optional, both companies would have to agree not to exercise their rights for it to fall through. Based on Alcon's closing share price on 4 April 2008, the combined premium would be a maximum of 13 per cent to complete the two steps.

Novartis says it will finance the purchase of the 25 per cent Alcon stake in the first step from internal cash reserves and external short-term financing, with borrowing needs currently estimated at $5.5 billion.

Financing for the second step would be through the Nestle's ongoing cash generation and further external borrowing.

Alcon makes Opti-Free contact lens solution and Systane eye drops and surgical equipment.

The completion of these two steps would enable Novartis to add the global leader in eye care products to its diversified healthcare portfolio as a majority-owned subsidiary, and says the acquisition would enhance the Group's longer-term growth prospects with greater access to the fast-growing eye care market, which had annual sales of about $25 billion in 2007.

Novartis has no obligation to purchase the remaining 23 per cent of shares held by Alcon's minority shareholders at any time.

Nestle  has been spinning off its non-food business in recent years, while expanding in the areas of nutrition, health and wellness. Last year it bought the medical nutrition and Gerber baby foods units from Novartis for about $8 billion.

Novartis has been aggressively spending on acquiring healthcare businesses. It spent $13 billion on acquiring generic-drug makers Hexal AG and Eon Labs Inc. in 2005 and the $5.7 billion acquisition of vaccine maker Chiron Corp. in 2006.

"This acquisition furthers our strategy of accessing high-growth segments of the healthcare market while balancing inherent risks,''said Dr. Daniel Vasella, chairman and CEO of Novartis. ''The strategic fit of Alcon and Novartis is excellent with our complementary product portfolios and R&D synergies. Eye care will continue to grow dynamically as there is a growing unmet medical need driven primarily by the world's aging population."

Alcon, based in Huenenberg, Switzerland, is the world's largest and most profitable eye care company with 2007 annual sales of $5.6 billion, operating income of $1.9 billion and net income of $1.6 billion. Alcon offers a range of pharmaceutical, surgical and consumer eye care products used to treat diseases, disorders and other conditions of the eye.

Its 2007 sales in its three business areas were:
Surgical: $2.5 billion, +13 per cent Pharmaceuticals: $2.3 billion, +15 per centConsumer: $0.8 billion, +15 per cent.

Alcon was acquired by Nestlé in 1978, and subsequently spun off in a partial initial public offering in 2002 on the New York Stock Exchange at $33 per share and has multiplied five fold in value since then. With to its focus on innovation, a broad product portfolio and strong sales force, Alcon has consistently outperformed its industry peers; its sales have risen 13 per cent annually between 2002 and 2007, with operating income rising at a faster 22 per cent annual pace during the same period.

With operation through associates in 75 countries, Alcon's sales are split nearly equally between the US and rest of the world, benefiting from both US and international expansion, with countries such as Brazil, Mexico, Russia and China  contributing sales by 21 per cent in 2007.

Nestle will also benefit from Alcon's R&D investments of $564 million in 2007 or 10 per cent of sales. Over the next five years, Alcon plans to invest at least $3.5 billion to support the expansion of its pipeline, which includes more than 15 projects in late-stage development.

Cary Rayment, who has been with Alcon since 1989 will remain as chairman, president and CEO after the acquisition  by Novartis, which will have a representative on Alcon's board of directors. However, Alcon and Novartis will remain separate and independent companies.

Strategic benefits and synergies:
Novartis has been expanding its business from prescription drugs, which face increasing competition from generic medicines and a tougher path to markets, to non-traditional areas like vaccines, eye care and generics.If it acquires the remaining 52 per cent from Nestlé during the second step, Novartis and Alcon will have a broader combined portfolio of eye care products, in particular with CIBA Vision's contact lens business and Novartis medicines such as Lucentis for severe eye diseases not addressed by Alcon's portfolio.

Other opportunities include R&D activities and an even more aggressive expansion in fast-growing regions, particularly Asia, where Novartis has long-standing operations. In addition, the relationships of Novartis with healthcare payors and strong health economics activities could contribute to Alcon's marketing programs.

On the other side, Alcon would help limit risks within the Novartis portfolio based on its diversified payor structure with reduced risks of price regulation, leadership in a specialty healthcare area, and greater access to businesses with discretionary consumer spending.

For Nestlé the sale would now give it the financial muscle to seek acquisitions at over its previous, self-imposed limit of spending around $2 billion annually, if it finds an acquisition strategically necessary. The foods giant says it would use the proceeds from the sale to reduce debt, buy back more of its own shares and support acquisitions in line with its focus on food, diet and lifestyle products.

The French cosmetics giant L'Oréal has been thought to be a strong possible takeover target, in which Nestlé has a 30-per cent stake, which it is required by law to hold till 2009.

Nestle chairman and chief executive Peter Brabeck-Letmathe, who steps down this week, said the deal was good for his company's shareholders and would give Alcon a new minority shareholder "whose activities are closely aligned with its own business.

Credit Suisse Group advised Nestle on the sale. Goldman Sachs Group advised Novartis.