Three Ways to Make Money from Alcon

Includes: ACL, NSRGY, NVS
by: Stephen Rosenman

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 (NYSE:ACL), the Swiss eye care company.

Remember that Nestle (OTCPK:NSRGY) once owned 77% of Alcon. Back in April 2008, Novartis (NYSE: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.