The case talks about Nestle which is the world’s largest food company trying to assess whether a part of Alcon which is one of its major non-food holdings should be carved out for a public listing or not. There were many reasons mentioned in the case for this carving out like the heads wanted the market to reflect the full value of Alcon and only food and beverage analysts follow Nestle group and so on. The case tries to evaluate whether it was needed at first, if yes then wh at impact would such an event have on Nestle’s overall valuation? Then if they did go for an IPO, on which stock exchange should they list? Nestle is a Swiss firm listed in Zurich and Alcon is operationally based in United States. There are 4 choices given to this and the pros and cons to come up with the listing choice are provided.
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Identification of Problems Nestle is a Swiss firm listed in Zurich and Alcon is operationally based in United States. 1) How to arrive at an appropriate valuation of Alcon? 2) How will carving out impact the valuation of Nestle, the company? 3) Are the reasons of spinning off justified? 4) On what stock exchange should Nestle list Alcon?
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Theories to Solve problems
Below mentioned are some of the pointers that should be kept in mind while designing the strategies that should be followed by the company: 1. 2. 3. 4.
Appropriate valuation model Evaluate each choice by pros and cons with regards to listing option The long-term perspective should be kept in mind while planning the strategies Effective equity carve out strategies
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List of alternative Solutions to the Problem
The listing choices for Alcon, along with their advantages and drawbacks have been discussed below.
1. The first option to Move to US, become a US corporation and list in US: This method involves Alcon to move to US and incorporate 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 inv estor base are mainly US- based. But it has been rejected by Nestle’s executives saying that Alcon’s IPR to be kept in Switzerland.
2. The second option is listing in Zurich: Switzerland is a developed market with few restrictions. The major drawback here: 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 limits Alcon’s investors base.
3. The second option is listing in Zurich and issuance of 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 pros are Access to more investors
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Broader shareholder base
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Increases liquidity of shares and making it less risky
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Good corporate governance – filing US GAAP accounts
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Increased firm’s valuation
Cross-listed firms have higher returns and a lower cost of capital
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May make a firm and its products more recognizable in US
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Easier for foreign firms to compete for managerial talent since they can offer managers stock
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options in the form of ADRs May also increase executive pay – universe of comparable companies broadens to US and global
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firms which usually have higher levels of compensation
The possible major drawbacks that are with this option are: May not retain its Swiss identity
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Require more transparency in operations and results
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May become a takeover candidate
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Undermining Nestle’s corporate culture and protection it enjoys from takeover
4. The fourth option was a 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.
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Analysis based on Valuation
Valuation based on multiples
Alcon 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.
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Growth rate: twice the Nestle group’s growth rate
Should have higher valuation multiple than Nestle group
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Nestle’s EBITDA multiple: 12.7X (in line with competitors)
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Other businesses embedded in that multiple masked a food and beverage business that was trading
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at a discount to its peers – Alcon and 26% stake in L’Oreal
Nestle’s current rating: AAA
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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.
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EV/EBITDA value of F&B segment
EV/EBITDA value of Pharma segment
Company
%of F&B
EV/EBITD A
Company
%of F&B
EV/EBITD A
Cambell
91
11.02
Allergan
63
22.42
GM
100
18.94
King
86
24.48
Heinz
100
10.38
Teva
88
18.63
Kellog
100
11.14
Forest
100
31.47
Kraft
100
5 Weighted Av EV/EBITDA
Weighted Av EV/EBITDA
24.64
11.3
The total value deriving on the basis of multiples
Company NESTLE F&B ALCON
EBITDA
Multipl e
EV
4970.83
11.3
56175.67
684.52
24.64
16867.68
LOREAL
9113.69
TOTAL
82157.04
Now we compare it to the current value of $74,956Mn, so by our calculations it implies it is undervalued. The true value can be achieved by separately listing Alcon along with Nestle.
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Findings and Recommendation
6.1 Findings Current value of $74,956Mn, Value coming from our valuation method (multiple based) = $82157.04Mn So by our calculations it implies it is undervalued. And to unearth the true value, it can be achieved by separately listing Alcon along with Nestle.
6.2 Recommendations
By our valuation method (multiple based) it is clear that the subsidiary will be better if it is listed separately from Nestle.
With regards to the location of listing , after evaluating the pros and cons of all the four options the fourth option that is listing in US appears to be the most suited. Choice of listing - Alcon should stay is Switzerland and directly list in the US.
