NESTLE AND ALCON
– THE VALUE OF LISTING
Submitted To Prof Ganga Srinivasan
Submitted By Group 7 Ajit Kr Jha (WMP-08052) Khushboo Mamtani (WMP-08067) Vikas Hajela (WMP-08093) Yogesh Verma (WMP-0809 (WMP-08095) 5)
Table of Contents Introduction .................................................................................................................................................. 2 About Nestle ............................................................................................................................................. 2 About Alcon .............................................................................................................................................. 3 Aging population ........................................................................................................................................... 4 Reasons for spinning off ............................................................................................................................... 4 Listing choices for Alcon................................................................................................................................ 4 Valuation ....................................................................................................................................................... 6 Recommendation .......................................................................................................................................... 8
Introduction About Nestle
Nestle is known for food brands like Nescafe, Perrier and Buitoni. Additionally the company has some other non-food activities as well. The activities in other sectors are;
a. Alcon: It is a fully owned eye-care company. It produces ophthalmic drugs, equipment’s for ocular surgery and contact lens solutions. b. L’Oreal: A large stake in the cosmetic giant
Nestle is the world’s largest food company and the world leader in Soluble coffee,
Mineral water, Dairy and Infant nutrition. Also the company is very active in Ice cream, chocolate and pet food segments. The key financial details for Nestle for the year 2001 were:
Group’s net profits: CHF 5.7 billion (USD 3.5 billion)
Annual sales: CHF 81.4 billion (USD 48.2 billion)
Estimated global market share: Food and beverage industry: 1.4%, Processed and branded products: 2.6%
Contribution of top brands Nestle, Nescafe, Nestea, Maggi, Buitoni and Friskies: ~70% of sales
Two leading business segments (nearly 60% of sales): Beverages and milk products, Nutrition and ice cream
Reminder of business: Prepared dishes, Cooking aids, Pet care, Confectionery and biscuits, Pharmaceutical products
Chocolate,
The company employs more than 250,000 people in 508 factories and offices in over 80 countries. Sales were geographically spread evenly across Europe and US, about 30% each, Africa, Asia and Oceania, about 19%. Swiss company had only 1% sales in Switzerland. About Alcon
It is the eye care subsidiary of Nestle, which was founded in the year 1945 by two pharmacists. The company specialized at ophthalmic products. By the year 1970 it experienced early success and continued growth and the sales reached $25 million. The company was publicly listed in 1971. In the year 1977 it was wholly acquired off the New York stock exchange by Nestle. Alcon held most of its intellectual property rights with Nestle in Switzerland. In the year 2000 Alcon became the world’s leading
Ophthalmology Company with net earnings of $331 million and sales reaching $2.5 billion. It developed manufactured and marketed ophthalmic pharmaceuticals, ophthalmic surgical equipment’s, Contact lens care products, and consumer eye care products. It is not active in glasses and contact lenses areas. It operates in 75 countries and employees nearly 11,000 people. The products are present in 180 countries with total sales staff of 2,200. The sales staff focused on markets outside US numbers 1,500.
It is leader in every product category it entered and is twice as large as its nearest competitor. The ophthalmic products contribute 1/4th of $11 billion dollar global market. It is the largest and most profitable purest ophthalmic company in the world. The contributions of Alcon to the global sales are, 19% of ophthalmic pharmaceutical market, 45% of ophthalmic surgical market and 19% of ophthalmic consumer market.
In 2001 several future growth trends reasons were present. The major of them are:
Aging population
Rising in emerging markets
Increase in eye related disorders
Increase in number of customers who could afford eye care products
Ophthalmology market was relatively intensive to short-term economic cycles
The 10-year growth plan of the company is:
More than promising R&D pipeline
To become the one-stop-shop for ophthalmologists worldwide
The current situation is that Nestle is a Swiss firm listed in Zurich and Alcon is operationally based in United States.
Reasons for spinning off
Market to reflect the full value of Alcon
Only food and beverage analysts follow Nestle group
Pharmaceutical Analyst do not consider Alcon being part of Nestle
To come out with conglomerate discount
Paying of Nestle’s debt to maintain stellar credit rating
Can use appropriate market multiple
Can use stock option to pay compensation
Listing choices for Alcon
The listing choices for Alcon, along with their advantages and drawbacks are discussed below.
1. Move to US, become a US corporation and list in US: The option says that Alcon move to US and incorporates it as a US firm and list in New York stock exchange. It seems to be a sensible option considering Alcon’s operations and its natural investor base are
mainly US-based. But it has been rejected by Nestlé’s executives saying that Alcon’s IPR to be kept in Switzerland.
2. List in Zurich: Switzerland is a developed market with few restrictions. The major drawback here is that US investors have to deal in foreign currency incurring higher transaction costs making the share less attractive. Also US pension and MFs are restricted from buying foreign shares. These reasons lim its Alcon’s investors base.
3. List in Zurich and issue ADR: The other option is to list Alcon in Switzerland and issue ADR in US. In this case also the US investors have an underlying economic exposure to USD/CHF exchange rate. The major advantages of this option is
Access to more investors
Broader shareholder base
Increases liquidity of shares and making it less risky
Good corporate governance – filing US GAAP accounts
Increased firm’s valuation
Cross-listed firms have higher returns and a lower cost of capital
May make a firm and its products more recognizable in US
May be useful as an acquisition currency
Easier for foreign firms to compete for managerial talent since they can offer managers stock options in the form of ADRs
May also increase executive pay – universe of comparable companies broadens to US and global firms which usually have higher levels of compensation
The major disadvantages associated with this option are:
May not retain its Swiss identity
Requires more transparency in operations and results
May become a takeover candidate
Undermining Nestle’s corporate culture and protection it enjoys from takeover
4. Stay in Switzerland and directly list in US: It avoids potential problem of flow back since Alcon’s shares traded only in New York. Also Alcon will be able to fully enjoy the
benefits of being a US firm with a primary listing in New York without any of the drawbacks of reincorporating as a US firm.
Valuation
Factors to consider for Valuation
It is a small part of the overall Nestle group contributing 5% of sales and 12% of EBIT. It is a large specialty pharmaceutical company in its own right. Alcon’s value was
completely buried in food and beverage ocean of Nestle.
Growth rate: twice the Nestle group’s growth rate
Should have higher valuation multiple than Nestle group
Nestle’s EBITDA multiple: 12.7X (in line with competitors)
Other businesses embedded in that multiple masked a food and beverage business that was trading at a discount to its peers – Alcon and 26% stake in L’Oreal
Nestle’s current rating: AAA
S&P and Moody ’s analysts put the company on its watch list
Nestle was valued with a multiple prevalent for food companies in the market. This was because the portfolio was dominated with food products. As growth prospects of Alcon was much higher so a higher multiple for the Alcon division should bring in more value
to Nestle than the food division. So, the better method to vale Nestle should be sum of parts. In this, we need to compute the enterprise value of the three businesses.
The average value for EV/EBITDA multiple for the food and beverage division is as follows: Company Cambell General Mills Heinz Kellog Kraft Weighted Average EV/EBITDA
F&B 91% 100% 100% 100% 100%
EV/EBITDA 11.02 18.94 10.38 11.14 5 11.30
The average value for EV/EBITDA multiple for the pharmaceutical division is as follows: Company Allergan King Teva Forest Weighted Average EV/EBITDA
Pharmaceutical 63% 86% 88% 100%
EV/EBITDA 22.42 24.48 18.63 31.47 24.64
The total value based on the multiples found above is follows: Company (figures in $Mn) EBITDA Nestle F&B 4970.833 Alcon 684.5238 L'Oreal Total
EV 56175.68 16867.68 09113.69 82157.05
Multiple 11.30 24.64
Comparing it to the current value of $74,956Mn, the company looks undervalued. This value can be unlocked by separately listing Alcon along with Nestle.
Recommendation
By valuation it is clear that the subsidiary will be better if it is listed separately from Nestle. It will help in unlocking the value of the subsidiary.
Also for the location of listing considering all the four options the fourth option that is listing in US seems to be the best one. Hence Alcon should stay is Switzerland and directly list in the US.
