Case Background

Nestle is a Swiss food giant known for food brands like Nescafe, Perrier and Buitoni.
Additionally, the company had some other non-food activities as well. The activities in
other sectors were:
 Alcon: a fully owned eye-care company. It produces ophthalmic drugs,
equipment’s for ocular surgery and contact lens solutions.
 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 3.4 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 and Friskies: ~70% of
sales
 Two leading business segments (nearly 60% of sales): Beverages and milk
products, Nutrition and ice cream

The company employs more than 250,000 people in 508 factories and offices in over
80countries. 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.

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 what 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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Facts and Details:
1. Alcon was a small part of Nestle with 5% of sales and 12% EBIT
2. The growth rates of Alcon has sometimes been twice that of Nestle. Hence, the
valuation multiple of Alcon must be higher than Nestle so that analysts can ten find the
true value of Alcon
3. Nestlé’s evaluation was bundled with the performance of its other business-like Alcon
and its stake in L’Oréal
4. Nestle reported a 12.7 times EBITDA multiple when compared to its competitors which
might be incorrect because of point 3
5. The board members also wanted to know how these companies are doing
independently and the reason for their valuation multiples.
6. They also believed that since Alcon was doing well, its board had to be paid better and
IPO was the way to achieve it.
7. Also, Nestle was undergoing another acquisition of Ralston Purina and was aware of
losing its AAA rating due to the borrowing it had to take (around $10 billion).

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 Critical Financial Problems

Q1. If Alcon must go for public listing or not?

If yes, what would be its valuation and where to list it?
Analysis needs to be done to assess how these two companies were doing individually in terms of
valuation.

Ans - If the company wanted to go for IPO, it had 4 options:

a) Swiss Listing: IPO Alcon in Zurich. As a subsidiary of another company, it was already
following Swiss securities laws and would simplify the process. This would also reduce
administrative costs of the outstanding common shares between Nestle and Alcon. The advantage
would be that its investor would be limited to Swiss pool.
b) Dual Listing: This option provided Alcon by issuing the shares in U.S but still under a Swiss
name. This would help target the pharma investors in US but would create issues that the company
would have to follow the securities laws of both the countries and many a times they are different.
And historically, it was seen that dual market limited the firm’s growth in many cases.
c) U.S Listings: Nestle could reincorporate Alcon as US subsidiary and offers hares in USA. But
then Alco would be subjected to US income tax laws and could not claim Swiss deductions. Also,
the CEO was not interested in this option because the costs that would be required to set up the
Alcon listing in US by changing the governance, operations, financial reporting and listing were
huge and Nestle would have to incur a lot of costs.
d) American Depository Receipt (ADR): ADR offered many of the benefits of the US Listing and
would help target US pharma investors. However, ADRs were customarily used by foreign
companies there was a risk of placing Alcon on the diversified funds lists rather than niche investors
market.

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 Analysis and Interpretation

The best feasible solution would be to first divide the companies as per the business they offer and
valuate them. If the valuation figures are higher than the current value, it would mean that the IPO of
Alcon would help increase the valuation of the company.

EBITDA multiple (Enterprise Multiple) is used to compare the valuations of the company. It is given as:

Enterprise Value = EBITDA * Enterprise Multiple

Alcon Financials for 2000:

EBITDA:

Operating Income 596.8

Amortization 86.5
EBITDA 683.3

Enterprise Multiple:

Enterprise Weighted
Company EBIDTA %EV EV/EBIDTA
Value EV/EBIDTA
Allergan 9728 434 0.228 22.415 5.115
King 10429 426 0.245 24.481 5.989
Teva 8345 448 0.196 18.627 3.646
Forest 14128 449 0.331 31.465 10.428
Multiple 25.178

Nestle Financials for 2000:

EBITDA:

Profit before tax 8341

Amortization 414
Exchange
rate(CHF/USD) 0.56
EBITDA 3963.5

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Enterprise Multiple:

Enterprise Weighted
Company EBIDTA %EV EV/EBIDTA
Value EV/EBIDTA
Cambell 16254 1475 0.14 11.02 1.55
General
Mills 28104 1484 0.24 18.94 4.61
Heinz 19855 1912 0.17 10.38 1.78
Kellog 18262 1640 0.16 11.14 1.76
Kraft 33082 6808 0.29 4.86 1.39
Multiple 11.091

Current Valuation:
Enterprise Enterprise
Company EBITDA
Multiple Value
Current
Value(Nestle + 5041.80 12.70 64030.86
Alcon + L'Oreal)

Valuation after IPO:

Enterprise Enterprise
Company EBITDA
Multiple Value
Alcon 683.30 25.18 17204.13
Nestle 3963.50 11.09 43959.04
L’Oréal NA NA 9100.00
Total EV 70263.168

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 Conclusion

1. The EV for Nestle after the IPO ($70263) where in the three business are valuated separately
is greater than the current EV ($64030) and hence going for the IPO is a good option.
2. Market to be listed :
a) With Swiss listing, the market reach may be less and the EV might not increase as
expected.
b) The US Listing is not an option because of the costs in restructuring internal processes.
c) ADR might pose a bigger risk of placing the company as an international diversified
stock.
d) Hence, The Dual Listing would be the best option for Alcon. Although it has some
additional costs when considering the dual laws to be adhered, the best exposure to the
international pharma investors can happen if its dual listed and the true EV of Alcon can
be seen.

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