Three Ways to Make Money from Alcon

Keeping track of dates is important: birthdays, anniversaries, graduations, income tax deadlines. Miss the date and you're toast; get it right and you're safe. In the stock market, sometimes just remembering one important date is all that it takes to make a lot of money. For instance, one particular stock becomes a great deal more valuable on New Year's 2010. I wrote that date down on April 7, 2008 and it's now time to tell you to check out Alcon (ACL), the Swiss eye care company.

Remember that Nestle (NSRGY.PK) once owned 77% of Alcon. Back in April 2008, Novartis (NVS) agreed to buy 25% of Alcon from Nestle for $143 per share. Novartis and Nestle struck a deal as to how to dispose of Nestle's remaining 52% of Alcon. Starting on New Year's Day 2009 until July 31, 2011, Novartis has the right to buy those remaining Alcon shares from Nestle at $181. On the other hand, Nestle has the option of selling those shares for $181 a share or for 20.5% above the market price of Alcon covering the preceding week (whichever is less). Right now Alcon trades at $132. If this was New Year's, Nestle could force Novartis to buy its shares at about $159. As the months go by, Novartis must be hoping that shares will not reach $144 or they will be forced to eat the deal at $181, or $28 billion. It's going to get pretty tense around Novartis come 2010.

Now that deal doesn't directly have to do with the 23% of shares not owned by Novartis and Nestle. However, as we get closer to New Year's, Alcon share price should move ever higher in anticipation of the deal. In fact, I wouldn't be surprised to see Nestle in there bidding up Alcon shares or Novartis shorts gobbling up Alcon.

You should be able to make money three ways:

1. Simply buy Alcon. Shares go higher.
2. Short Novartis. Paying up $28 billion might be tough for them. They'll be buying over half of Alcon at a 37% premium. A $100 billion market cap company swallowing what would be a $54 billion (in total) Alcon would be a stretch.
3. Go long Nestle. $28 billion buys a lot of chocolate.