Final ppt of Nestlé-Alcon Groupwork, Corporate Finance course, DDIM 2011, Shanghai.
In this assignment we played the role of an investment bank. Our role was to persuade Nestlé's management to list Alcon.
No need for further company descriptions given the fact the presentation is addressed to Nestle’s managers.
- Let emerge the real value of Alcon, actually buried in the food and beverage ocean of Nestlé: Alcon’s business and performance is not properly evaluated inside Nestlè capitalization from the analysts. Alcon is now accounted by analysts as a part of Nestlé food & beverage business because it represents just a small part of Nestlé’s business. - Alcon’s value can be better understood by analysts and investors: when conglomerate breakups lead to an increase in analyst forecast accuracy thanks to the fact that new analysts with relevant industry expertise will begin covering the newly listed company. - Alcon could have higher evaluation multiples (by carving put Alcon, it ’ s likely that Nestle will have higher evaluation too). Nowadays the final price at which Nestlè security is traded is similar to the F&B competitors multiples. If Alcon would be carved out from Nestlé its value could be better evaluated by analysts, and the company could target specialty pharmaceutical investors in the stock market. - Create liquidity in order to overcome the cash needed for the Ralston-Purina acquisition; - Alcon’s carve out is also facilitated because Alcon is already a financially independent entity with its own capital structure inside Nestlé.
- Incentive for managers of Alcon through a stock options program; - Focus better on the core business: i nside its sector Alcon is the market leader with a strong R&D commitment and promising projects in the pipeline; - Make easier the assessment of the value of the single business units; - Lay the foundation for an eventual future sale of Alcon ( probably in order to focus on the core business in a long-run perspective) - Easier planning of the future strategies for each business: Alcon operates in a different industry than Nestlé, characterized by higher market growth, lower competition and positive future forecasting; moreover competition is slowing as competitors are divesting their operations from that business. Be separated by Nestle could lead to a better and more focused decision process.
We consider IPO to be the best alternative possible in order to persuade our customers to use our service. It is for this reason that we decided not to include in the presentation any other viable solution regarding Alcon. There are, anyway, several other possible alternatives for this company. Among those are: 1- SALES TO COMPETITORS Nestlé Group could try to sell Alcon to some other pharmaceutical holdings. The sale of Alcon, however, has different drawbacks: 1-As Alcon has great power to earn revenue in the future and the current operation situation is satisfactory; selling it would have a high cost of capital. And holding Alcon will continue bring value for Nestlé’s shareholders. 2-loss control of Alcon, nevertheless a profitable company. Based on these two main reasons, it is not recommended (and anyway not in our intentions) to sale Alcon to competitors. 2- LEVERAGED BUY OUT There is no hint that the original management team has the intension to do the LBO.
Our final recommendation to Nestlé group’s management team is to list Alcon on the US market. The rationale behind it is to potentially solve the company’s financial needs by listing in a market larger and with a broader institutional investment base. The United States market will also provide to the company a greater visibility in the international environment. Moreover, the cost of listing in the US market is commensurate to the return Alcon will make out of it. For U.S.listing, Alcon should change the name to Alcon.inc , have the new American style board, follow GAAP Reporting System and make conversion of employees compensation plans in stock options. Besides, listing in U.S. would make the financing channel closer to headquarter, R&D centre and the primary market. For Swiss listing, the small market size is not satisfactory and it is unfavorable under a managerial standpoint given the fact that more than half of Alcon’s operations and sales are within USA. Dual listing is not necessary because it is an extraordinarily expensive procedure due to replication costs as well as potentially leading to a flow back effect. As for the ADR, Alcon would be recognized as a foreign company and face strict requirements in order to adhere to direct listing. It would potentially narrow the investment base and raise overall costs. Furthermore, it is not a good choice for trading in secondary market, due to time lag and higher commissions. Moreover, ADR could attract international diversified funds instead of specialty pharmaceutical investors, which would be in the interest of the firm.
Nestlé and Alcon, The Value of a listing - DDIM2011 Shanghai - group 9
Nestlè and Alcon: “ the value of a listing ” Group 9 Yu Yu Gao Yi Ling Sun Marta Caccamo Marta Cenni Flavia Assogna Wei Liu Daniele Corti Vito Margiotta
World ’s NUMBER ONE food company (2000) WE ARE HERE TO TALK ABOUT
<ul><li>Half of sales outside USA </li></ul><ul><li>Phantom stock program </li></ul><ul><li>Expectation of STRONG growth </li></ul><ul><li>12% of EBIT of Nestlé Group </li></ul><ul><li>Alcon E nterprise V alue ? </li></ul><ul><li>Acquired in 1977 </li></ul><ul><li>World leading ophthalmology company </li></ul>
- Company ’ s value is underestimated. - Increase the overall understanding of company ’ s business (especially in terms of financial forecasting accuracy) - Enhance company liquidity. Part 1 of 2 Financial Reasons See note for an in-depth explanation and additional reasons.
Part 2 of 2 - Target and attract specialty pharmaceutical investors. - Focus and leverage on Nestlé core business. - Eager company strategy planning process. - Decrease agency problems by implementing a managerial stock option plan. Managerial Reasons See note for an in-depth explanation and additional reasons.
Enterprise Value, million USD Total EV Added = 7.300 Million USD = 7.49% NOTE: See appendix for further clarification. 97500
<ul><li>Swiss market size scarcity of liquidity </li></ul><ul><li> poor visibility ____ </li></ul><ul><li>Few large Institutional Investors expert in Ophtalmology </li></ul><ul><li>More than half operations and sales are in the U.S. </li></ul><ul><li>Simple to implement no legal adjustments </li></ul><ul><li>Low administrative costs same reporting schedules and investors ’ announcements </li></ul>1) SWISS LISTING SWISS LISTING
<ul><li>Attract U.S. Investors Liquidity Availability </li></ul><ul><li>Closer to headquarter, R&D centre and primary market </li></ul><ul><li>More visibility </li></ul><ul><li>No more royalty deductions </li></ul><ul><li>High costs for reorganization </li></ul><ul><li>Duplication of administrative costs </li></ul><ul><li>New name Alcon Inc. </li></ul><ul><li>New American style board </li></ul><ul><li>GAAP Reporting </li></ul><ul><li>Dividends in $ </li></ul><ul><li>List on NYSE </li></ul><ul><li>Conversion of employees compensation plans in stock options </li></ul>NOTE: Being perceived as foreigner it is not recommended. CONDITIONS: 2) U.S. LISTING
DUAL LISTING 3) DUAL LISTING <ul><li>Expensive procedure </li></ul><ul><ul><li>- Issuing Cost _____ </li></ul></ul><ul><ul><li>- Different Accounting Systems _____ </li></ul></ul><ul><li>Inconsistent Security Laws </li></ul><ul><li>Flawback Effect. </li></ul><ul><li>Acheive investors of both Swiss and US, provide the </li></ul><ul><li>biggest market among the four listing method </li></ul><ul><li>Be able to target the specialty pharmaceutical investor </li></ul>
4) ADR <ul><li>Attract international diversified funds instead of the specialty pharmaceutical investors </li></ul><ul><li>Be recognised as a foreign company </li></ul><ul><li>For issuing shares(Level 3), face strict requirment adhere to direct list </li></ul><ul><li>Not good choice for trade in secondary market </li></ul><ul><ul><li>Time lag </li></ul></ul><ul><ul><li>Higher commission </li></ul></ul><ul><li>Be Familar with most US instituional investor. Can target sizeable American capital market . </li></ul><ul><li>Less requirement than direct issuing. </li></ul><ul><li>Easy to trade for investors. </li></ul>
BEFORE BREAKING DOWN EBITDA EV/EBITDA Multiple Value Nestle - Alcon 6957.87 a 12.725 88540 Alcon 704.13 b 12.725 8960 Total 7662 12.725 97500
Schweppes is not chosen because of its low involvement in F&B industry. Danone and Unilevel are not included due to incomplete data. Allergan is not considered because of its low involvement in Pharma industry. BREAK DOWN Company %F&B Industry EV/EBITDA Multiples Cambell 91% 11.02 GeneralMills 100% 18.94 Heinz 100% 10.38 Kellog 100% 11.14 Kraft 100% 5.01 F&B Average 11.30 Company % Pharma industry EV/EBITDA Multiples Allergan 63% 22.41 King 86% 24.48 Teva 88% 18.63 Forest 100% 31.47 Pharma Average 24.25
AFTER BREAKING DOWN EBITDA EV/EBITDA Multiple Value Nestle F&B 6957.87 11.30 78624 Alcon 704.13 24.25 17075.15 L'Oreal _ - 9100 a Total - - 104800