The Swiss drugmaker, which bought 25 percent of Alcon in 2008, said on Monday it was exercising an option to buy a further 52 percent from the world's largest food group for $28.1 billion, boosting its stake to 77 percent.
Novartis, which was widely tipped to snap up the Nestle stake as soon as its option allowed, also aims to buy out the 23 percent held by minority shareholders for $11.2 billion, ending uncertainty over whether or not it would seek full control.
Novartis and rival drugmakers such as GlaxoSmithKline and Sanofi-Aventis are pushing into areas like consumer healthcare and generics as they face the biggest loss of patent protection in history.
Novartis is offering minorities 2.80 Novartis shares for each remaining Alcon share, which amounts to $153 per share, based on December 30 prices, versus the $180 agreed with Nestle.
SWISS MERGER LAW
Under Swiss law, Novartis can force through the deal once it takes majority control from Nestle as mergers require approval of two-thirds of shareholders and a simple board majority.
We consider that the price we offer to minority shareholders is very fair. If this could be concluded faster that has a benefit. If not we have to wait until we have control of the company, said Chief Financial Officer Raymond Breu.
Alcon stock fell more than 3 percent to $159.3 in early trade -- still a premium to Novartis's offer, which was worth around $148 after a 2.7 percent fall in Novartis shares, but well below earlier pre-market dealings of $170.
NOVARTIS HAS UPPER HAND
It appears that Novartis has the upper hand due to unique circumstances related to Swiss merger law, said Sanford Bernstein analyst Tim Anderson, adding that minority shareholders could try to challenge the deal in court. But at first blush the odds of this being successful appear low.
Alcon was founded in 1945 in Fort Worth, Texas by pharmacists Robert Alexander and William Conner, who combined the first syllables of their surnames for the company name.
Bought by Nestle in 1977 for $280 million, it is the global leader in ophthalmic surgery products, particularly for cataract operations, and also produces medicines for eye diseases like glaucoma as well as contact lens products.
Novartis will bring it together with its own CIBA Vision contact lens business to create an enlarged eye care business with pro-forma 2008 net sales of $8.5 billion.
The addition of Alcon will strategically strengthen our healthcare portfolio and our position in eye care, a sector with dynamic growth due to the increasing patient needs of an aging population, said Novartis Chief Executive Daniel Vasella.
Nestle, the Swiss maker of Nescafe coffee and KitKat chocolate bars, said separately the deal would allow it to launch a new 10 billion Swiss franc ($9.64 billion) share buyback program for two years once its existing 25 billion program is completed this year.
That was less than some analysts had forecast, stoking speculation Nestle could also use some of the Alcon proceeds for buys, possibly entering the fray for British chocolatier Cadbury amid a hostile bid from Kraft Foods .
Nestle shares were 1.5 percent higher by 1500 GMT.
The 10 billion franc buyback announcement could disappoint investors and renew speculation that Nestle is about to get involved in a large M&A transaction, said Kepler Capital Markets analyst Jon Cox.
Nestle has always declined to comment on a possible Cadbury bid although Chief Executive Paul Bulcke said in September the group had no plans for big acquisitions. Analysts say a more likely target could be U.S. babyfood group Mead Johnson Nutrition Co , valued at around $9 billion.
Once the deal is completed, Nestle will have realized more than $40 billion from its gradual divestment of Alcon, including the sale of 23 percent in an initial public offering in 2002.
Alcon said its independent director committee was reviewing the Novartis offer and noted minorities were being offered about 15 percent less than Nestle was getting.
Novartis needs full control of Alcon to achieve planned annual pre-tax synergies, which it projects at $200 million three years after closing the deal with Nestle. It sees a further $100 million on winning 100 percent.
Morgan Stanley analysts said total synergies of $300 million appeared conservative, since consensus expectations had been around $700 million to $900 million a year.
Vasella said Novartis did not expect big job cuts as he expected job creation should balance out redundancies.
Novartis said it expected to complete the deal with Nestle in the second half of the year, funding it from available cash resources and up to $16 billion of external debt financing.
The plan to pay minorities in Novartis shares rather than cash will help the Swiss company maintain its credit rating.
It will also ask its shareholders to approve the issuance of 98 million new shares to pay for the Alcon minority shares, together with 107 million shares held in treasury.
(Additional reporting by Ben Hirschler in London; Editing by Erica Billingham and Andrew Callus)