FINANCIAL MANAGEMENT

ASSIGNMENT

CASE 15: NESTLÉ and

ALCON - The Value of a
Listing
Prepared By –

Anurag Pan (G19058)

Henna Handa (G19067)

Saquib Raza (G19087)

Sreya De (G19093)

(SECTION B, GMP 2019-20)

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INDEX

1. Case Background…………………………………………………………………….Page 3

2. Critical Financial Problems identified in the case………………………………Page 4

3. Analysis and Interpretations for solving the case……………………………….Page 6

4. Specific Recommendations and Implementation……………………………..Page 9

5. Conclusion……………………………………………………………………………...Page 9

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Case Background
At beginning of the millennium Nestle was the world’s number one food company. Outside the
food sector, it had two significant investments -
 L’Oreal: Through its 49% Gesparal, it held 26% stake in L’Oreal, a French cosmetics
company.
 Alcon: It developed, manufactured and processed ophthalmic products (except glasses
and contact lenses). It was fully acquired off the NYSE by Nestle in 1970 and in 2000,
it reported net earnings of $331 million on sales of $2.5 billion, being world’s leading
ophthalmology company.

Key financials for Nestle (2001)

 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

It employed 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, and a little lower in
Africa, Asia and Oceania at about 19%. It had only 1% sales in Switzerland.

Though a specialty pharma company, Alcon constituted only 5% of sales and 12% EBIT for
Nestle group. It was reported as a part of Nestle’s consolidated operations, but its growth rates
were sometimes double than that of Nestle’s. So, the true value of Alcon could not be reflected
in this combined reporting. This would be possible on carving out Alcon and making it public.
In case if the carve out was considered, the next major concern was listing. The executives were
in dilemma as to which stock exchange should they be listing Alcon – Swiss listing, U.S. listing,
dual listing or floating ADRs.

Other issues -
1. Nestle reported a 12.7 times EBITDA multiple when compared to its competitors which
might be incorrect because it bundled Alcon’s figures in its reports.
2. The board members also wanted to know how these companies are doing independently and
the reason for their valuation multiples.
3. They also believed that since Alcon was doing well, its board had to be paid better and IPO
was the way to achieve it.
4. 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 Identified in the Case
5 critical problems identified in the case –

1) Should Alcon go for public listing at all?

Alcon is the world’s leading ophthalmology company with net earnings of $331m and sales
amounting to $2.5m. It has about 11000 employees in 75 countries. Although Alcon legally
became a Swiss domiciled company after Nestle’s acquisition, top management and R&D offices
remained in the US. More than half of company’s sales are in fact generated there. As of today,
the enterprise value of Nestle as a conglomerate, including Alcon, accounts for 97500 USD. A
carve out of Alcon, through an IPO, would increase this value. Furthermore, this will help
increase awareness of the company value among both managers and investors, disclosure of
Alcon’s real value, financial sustaining and downgrading avoidance, widening of customer base,
investment perspective and also, managerial motivation. The carve out of Alcon should create
about 7% more value.

2) Should Alcon be listed in the Swiss Listing?

Now that we have agreed on the fact that Alcon should be carved out of Nestle, let us see the
pros and cons to listing it in the Swiss listing. It would definitely be easy to implement as no
legal adjustments would be required. There would be low administrative costs since same
reporting schedules and investor’s announcements would be there. On the flip side, Swiss market
size would be a problem since it is small, along with scarcity of liquidity and poor visibility.
There are only a few large institutional investors expert in ophthalmology, whereas more than
half operations and sales are in the US.

3) Should Alcon be listed in the US Listing?

In the US Market, attracting US investors will be much easier for Alcon, hence more liquidity
availability. It would be closer to headquarter, R&D center and primary market. It would have
more visibility and well-developed regulation market. Availability of the largest number expert
pharmaceutical investors and lower information asymmetries. The cons would include no more
royalty deductions, high costs for reorganization and duplication of administrative costs.
Inability with the US standards and subjection to the US corporate income tax would be an added
disadvantage.

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 4) Should Alcon be listed in the American Depository Receipt (ADR) Listing?

If Alcon gets listed in the ADR listing, then it can target sizeable American capital market as it is
already familiar with most US institutional investors. There would be less requirement than
direct issuing and it would be easier for investors to trade. There would also be lower
administrative costs. However, there might be higher commissions and inflexibility for investors.
They might also lose interest due to the overspecialization of funds. Alcon might be recognized
as a foreign company; hence it might not be a good choice for trade in the secondary market
because of time lag and higher commission.

5) Should Alcon be listed in the Dual Listing?

If Alcon is listed in the Dual listing, it will be able to achieve investors of both Swiss and the US,
hence providing the biggest market among the four listing methods. It will be able to target the
specialty pharmaceutical investors. Although, there would be higher administrative costs, lower
success rate (as per statistics) and financing resource conflicts. It would be an expensive
procedure due to issuing costs and already implemented different accounting systems. The
security laws might be inconsistent and hence this action might have a flawback effect.

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Analysis and Interpretations for Solving the Case

For analyzing whether to raise an IPO for Alcon, we are deriving separate valuations for the
companies.
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

Calculation of Enterprise Multiple:

Weighted
Company Enterprise Value EBIDTA %EV EV/EBIDTA
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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Calculation of Enterprise Multiple:

Weighted
Company Enterprise Value EBIDTA %EV EV/EBIDTA
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

We see that the total valuation after raising the IPO would be more than the total current valuation.
So, the company should go for public listing of Alcon.

Now, to analyze whether the IPO should be listed in Switzerland, US, dual listing or as ADRs, we
look at positives and negatives of all the options.

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 Options Positives
Swiss Listing  As a Swiss subsidiary of
another Swiss company, it
would be easier to list Alcon
in Switzerland.
 It already operated under
Swiss security laws.
 Both Nestle and Alcon would
follow same reporting and
financial schedules
 It would minimize future
administrative costs towards
listed shares.
Dual Listing  It would help access to
additional capital pool.
 It would also target specialty
pharmaceutical investors.
U.S. Listing  It would help remove
(reincorporating reservations of U.S. specialty
Alcon as a U.S. investors in pharma.
subsidiary and then
offering shares in
U.S.)
American  Most U.S. institutional 
Depository Receipts investors were familiar with
this form of listing.
 The firm would be able to
target U.S. specialty pharma
investors.
 Depository banks were
experiences in minimizing
cross national differences and
making sure that the trade was
transparent.
Negatives
 It would limit Nestle and its
underwriters to limited pool
of investors in Switzerland.
 Alcon had already built on a
diverse group of legal
entities in US. Swiss listing
would limit it on that front.
 Co. was not sure if US
specialty pharma investors
would be interested in shares
of foreign companies.
 There would be additional
costs associated with dual
listing
 Alcon will have to abide by
both U.S. and Swiss securities
laws, which might not be
consistent.
 Dual listing was traditionally
known to have limited
success rate.
 Being fully subject to U.S.
corporate laws, entity will not
be able to claim deductions
for royalty payments to Swiss
parent co.
It ran the risk of being places
in the investment universe for
international diversified fund
rather than the target pool of
investors.
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Specific Recommendations and Implementation

The current valuation for Nestle, Alcon and Lóreal is around 64030.86$ and after listing the company
for IPO, the valuation of the firms increases significantly to 70263.168$. The options that the company needs
to follow is a dual listing one which has the following positives:

 It would help access to additional capital pool.

 It would also target specialty pharmaceutical investors.
However, there are quite a few disadvantages for this option which is listed as follows:

 Company was not sure if US specialty pharma investors would be interested in shares of
foreign companies.
 There would be additional costs associated with dual listing
 Alcon will have to abide by both U.S. and Swiss securities laws, which might not be
consistent.
 Dual listing was traditionally known to have limited success rate.
All these aspects will be taken care for in the beginning when the company files an IPO but in the longer term
it is best to go for Dual listing due to the large customer base and industries in the US.

Conclusion

As we have seen that the net valuation for Nestle goes up significantly after acquiring Alcon and
Lóreal, it would be right to go for an IPO listing for Nestle.

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