August 27, 2010 6:00 AM
Dealmaker of the Week: Eric Shube of Allen & Overy
Posted by Julie Triedman
At a signing ceremony Wednesday in Zurich, pharmaceutical giant Novartis finally closed a deal to take over a 77 percent stake in eyecare company Alcon held by Nestle. Novartis's quest had started two-and-a-half years ago, and the midweek event marked a big win for the company.
Since setting its sight on Alcon in 2008, about $40 billion in cash has changed hands between Novartis and Nestle. Currently, another $11 billion is on the table in Novartis's merger bid for a remaining 23 percent stake held by Alcon's minority shareholders. If Novartis succeeds at acquiring those remaining shares, as is expected, it is likely to become the largest merger in Swiss history, say lawyers involved in the deal. And it will mark another milestone, too, becoming one of the biggest buyouts in history, according to Dealogic. (The next-largest, according to Dealogic, was the $32.6 billion deal for Canadian telecom company BCE.)
The outcome may be uncertain, but so far Novartis's Swiss and U.S. lawyers have maneuvered smartly to maximize their client's position. The person directing those maneuvers and responsible for the structure of the Nestle share purchase is Allen & Overy's Eric Shube.
In early 2008, Novartis general counsel Thomas Werlen, who had practiced at A&O, turned to Shube and asked him to devise a legal strategy for the acquisition of the Swiss company Alcon, the world's largest maker of contact lenses and other eyecare products. Novartis, Switzerland's largest drug company, was looking to diversify its product base. Nestle, another Swiss company, wanted to raise cash, but not all at once. Executives from each of the companies wanted to make a deal.
In the first phase, Nestle agreed to sell Novartis a 24.99 percent stake in an all-cash deal--the percent was just under the threshold for deals that trigger extensive E.U. antitrust review. That purchase, first announced in April 2008, made it through regulatory review easily.
The second phase in this process was a longer one. For tax and accounting reasons, one deal lawyer says, Nestle wanted to wait until early 2010 to complete the sale of the rest of its stake. Still, Novartis and Nestle wanted to lock down an agreement, so the two sides signed on to a highly unusual options structure: beginning January 1, 2010, Novartis had the right to exercise call rights (the right to buy Nestle's remaining Alcon stock) at an agreed-upon price, while Nestle could force a deal via its put rights (the right to sell its stock) at another price. On January 4, Novartis exercised its rights. "There are very, very experienced deal lawyers who have never seen a structure like this," says one lawyer involved. "Most M&A lawyers look at deal precedents to structure a transaction. [Shube] had to go from scratch."
"I can't think of any deals I've worked on that have been structured like this," Shube says. In many instances, options agreements are written by the lawyers, but never executed by the companies.
Because of the change of control involved, the second share purchase faced six months of antitrust review, with filings in the U.S., Europe, Australia, and Canada. On Wednesday, it officially passed muster.
Still, the deal is not done. Alcon's remaining shareholders are standing in the way of Novartis's plans to take over Alcon completely, threatening litigation over an offer they say is unfairly low. In January, Novartis announced plans to acquire the rest of the company via a merger, offering a valuation that was substantially lower than the cash share price Nestle had received.
According to a lawyer on the deal, and as assessed by The New York Times's Deal Professor in this January post, a tender offer would likely have cost Novartis much more and would have implicated greater U.S. and Swiss regulatory scrutiny. By making its move via a merger, Novartis would have to abide by the much simpler Swiss Merger Act, requiring that two-thirds of the shareholders approve a merger, along with a simple board majority. The second share acquisition left Novartis with over three-quarters of the shares; on August 16, Novartis's slate of board members was installed, giving the company that requisite majority.
The deal "was structured to maintain as much control for Novartis of the outcome as possible," says one deal lawyer. (Neither Novartis in-house counsel nor Shube would talk about the current shareholder dispute.)
Because the company is incorporated in Switzerland, minority shareholders are not shielded from being squeezed out of the deal as they would be under Delaware law. Also, the company's listing on NYSE affords its aggrieved minority investors very little recourse.
In July, Alcon's independent directors announced that they had put together a $50 million litigation war chest, indicating that they are ready to fight. The endgame is likely to be fought out in Swiss board rooms or before a Swiss judge, say lawyers involved. So far, neither side has asked a judge for a declaratory judgment yet.Make a comment