Nestle Alcon Value of Listing free essay sample

Alcon’s value was completely buried in food and beverage ocean (Nestle) ‘Best way to show the intrinsic value of this fantastic company might be to make it public to let the market decide what the real value should be’ Growth rate: twice the Nestle groups 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 Guarding the Credit Rating: Early 2002 Nestle would pay $10. 3 billion in cash for pet food company Undertake debt reduction program after acquisition Nestle’s current rating: AAA SP and Moody’s analysts put the company on its watch list Firmly kept the highest credit rating possible Reasons for the carve-out of Alcon: 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 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 options: Now Nestle has to choose one of the listing options out of the 4 available to them. They have asked Credit Suisse First Boston to analyze these options and give them a report as to the consequences of each. The four options can be summarized as under: Swiss Listing: Simple to IPO Alcon in Zurich Swiss subsidiary of another Swiss company Already operated under Swiss securities laws Would simplify relations between Nestle and Alcon Minimize future administrative costs of outstanding common shares Would limit Nestle and its underwriters to the pool of capital in Switzerland Switzerland is a developed market with few restrictions. Moreover, it will be faced with certain drawbacks such as US investors having to deal in foreign currency resulting in higher transaction costs. Also the US pension funds and mutual funds are restricted from buying foreign shares. Hence, it would decrease the base of investors of Alcon. Dual Listing: Help target specialty pharmaceutical investors Forced to abide by US as well as Swiss securities laws – not always consistent with each other Trading normally seemed to center on one market, even if the shares were initially introduced in two places USA Listing Reincorporate Alcon as a US based subsidiary Fully subject to US corporate income tax Not able to claim deductions in US for royalty payments paid to Swiss parent company Management signaled that this is not an option Nestle would not move Alcon out of Switzerland Corporate governance Rename the firm Alcon, Inc. rather than Alcon. AG. , Amend the incorporation documentation to conform to US standards wherever possible Create a board of directors, with prominent independent US business figures; structure the board to resemble other US boards with characteristics such as staggered terms Financial reporting Regularly quarterly reporting of earnings under US GAAP Dividend payments in USD by establishing a hedging facility converting dividends declared in Swiss Francs into dollar denominated payments Exchange listing ADR would highlight Alcon’s foreign status Engage major settlement and custodian banks to create a share registry system to make procedures for trading shares and voting rights more like those for other US companies Operations Keep HQs, top management, and RD facilities in Texas From US – revenues: 53% and operating income: 58% However, this option has been rejected by the Nestle executives as they want the IPR to stay in Switzerland. Also, this has major cost benefits which it will lose in case it gets listed in US. American Depository Receipts (ADRs): Most familiar instrument May be targeted by US pharma funds May be seen as candidate for international diversifications Minimizes cross-national differences in securities regulations and trading conventions List Alcon in Switzerland and issue ADR in US. Still US investors have an underlying economic exposure to USD/CHF exchange rate. Advantages: Access more investors Broader shareholder base Increases liquidity of shares and making it less risky Good corporate governance – filing US GAAP accounts, meeting certain standards of corporate governance 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 Disadvantages: 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 Listing of Alcon and unbundling the value: Food and Beverage (FB) Industry Company %FB Industry Enterprise Value EBITDA EBITDA Multiples Cadbury Schweppes 51% 15,518 1,511 10. 3 Campbell 91% 16,254 1,475 11. 0 Danone NA 21,854 2,138 10. 2 General Mills 100% 28,104 1,484 18. 9 Heinz 100% 19,855 1,912 10. 4 Kellog 100% 18,262 1,640 11. 1 Kraft 100% 33,082 6,608 5. 0 Nestle 94% 97,500 7,662 12. 7 Unilever NA 50,038 NA NA Mean 11. 2 Median 10. 7 Pharma Company Company % Pharma Industry Enterprise Value EBITDA EBITDA Multiples Allergan 63% 9,728 434 22. 4 Bausch Lomb** 15% 2,150 222 King 86% 10,429 426 24. 5 Teva 88% 8,345 448 18. 6 Forest 100% 14,128 449 31. 5 Mean 24. 2 Median 23. 4 Valuation of Nestles Parts Enterprise Value EBITDA EBITDA Multiples Nestle FB 78,249. 25 6,978. 70 11. 2 LOreal 9,100. 00 NA Alcon 16,568. 09 683. 3 24. 2 Nestle 103,917. 34 7,662. 00 13. 6 This sums up the valuation multiples for each of the parts of Nestle. Thus summarizing, we can say that ADRs or Dual Listing should be opted for by Nestle for the listing of Alcon. Also, this listing will contribute significantly towards unlocking the value for Nestle in the desired fashion.