Eyes on Novartis shares as Alcon deal nears close

By Katie Reid

ZURICH (Reuters) – Novartis (NOVN.VX: Quote, Profile, Research) will closely watch the development of its share price over the next 10 days, which could come under pressure, ahead of the closing of its buyout of U.S.-listed eyecare group Alcon (ACL.N: Quote, Profile, Research).

The amount Novartis has to pay in cash will be determined by Novartis’ average share price over the next 10 days.

Some investors may buy Alcon shares and sell Novartis shares to profit from the cash component the Swiss drugmaker offered to Alcon minority shareholders as part of a sweetened bid to clinch the 23 percent of Alcon it did not already own.

“We expect an average of circa 15 million shares to be sold on each day during the VWAP (volume weighted average price) as arbitrage investors hedge their Alcon positions,” analysts at JP Morgan said in a note, which should create a buying opportunity.

“We believe that arbitrageurs will hedge the vast majority of their ACL positions by the end of the pricing period, which means we expect little flow back or selling pressure after the closing of the transaction,” the analysts said.

Novartis will pay 2.8 Novartis shares for each Alcon share and, if necessary, it will top this up with cash to ensure that Alcon shareholders get $168 per share — the average amount Novartis paid last year for Nestle’s (NESN.VX: Quote, Profile, Research) 77 percent stake in Alcon.

But the Novartis share price could climb once the deal is done, and analysts see upside to the Novartis stock thanks to recently launched products like oral multiple sclerosis pill Gilenya, its solid pipeline and potentially strong first quarter results on April 19.

THE ONLY WAY IS UP

At 1138 GMT, shares in Novartis were trading at 0.1 percent weaker at 49.32 francs, which would equate to around $151 per Alcon share, meaning Novartis would have to cough up just over $1 billion in cash.

Jefferies analysts said that with a share price of 54.60 francs, Novartis would not have to pay any cash.

Novartis shares have lost some 10 percent of their value so far this year, underperforming a 5 percent drop in the rest of the European healthcare index (.SXDP: Quote, Profile, Research).

“(This is) due to a lackluster 2011 guidance and more recently technical factors surrounding the Alcon merger, analysts at Citi said in a note.

Alcon and Novartis are holding extraordinary shareholder meetings on April 7 and April 8, and two-thirds of each company’s shareholders will have to vote in favor for the deal to go ahead.

Novartis, which has said it would buy back around $5 billion worth of shares to minimize dilution to Novartis shareholders, is not allowed to buy back any shares during this 10-day period.

Analysts expect Novartis to resume its share buyback after its first-quarter results, which could trigger a rally for the stock.

“Novartis is a strong overweight conviction call for us, as the market seems to underestimate the uplift from the buyback, margin upside and top-line upside from recently launched products and pipeline,” the JP Morgan analysts said.

Alcon is known for its contact lens solutions but is also the dominant player in the multibillion-dollar market for intraocular lenses, small lenses implanted in the eye to correct problems focusing.

(Additional reporting by Rupert Pretterklieber)

Eyes on Novartis shares as Alcon deal nears close