Nestle and Alcon ± The Value of a Listing

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Nestle and Alcon ± The Value of a Listing 


Dated: early Sept. 2001 People
± ± ±

Wolfgang Reichenberger, CFO, Nestle Francisco Castaner, EVP, Nestle Peter Brabeck-Letmathe, CEO, Nestle

2

Nestle 

Known for food brands.., 
 

Nescafe Perrier Buitoni Alcon ± fully owned eye care company
± 

Some select activities in non-food sectors 

Producer of..,  Ophthalmic drugs  Equipment for ocular surgery  Contact lens solutions 

L¶Oreal ± largest stake in cosmetic giant

3

Nestle 
 

Carving out Alcon for public listing World¶s largest food company World leader in.., 
  

Soluble coffee Mineral water Dairy Infant nutrition Ice cream Chocolate Pet food segments 

Very active in.., 
 

4

Discussion Question What effect a carve-out would have on Nestle¶s overall valuation? 5 .

Discussion Question How to arrive at an appropriate valuation of Alcon? 6 .

Discussion Question On what exchange should they list Texas-based. but Switzerland-incorporated. subsidiary in New York or Zurich? 7 .

6% Contribution of top brands Nestle..4 billion (~USD 48.     Two leading business segments (~60% of sales).Nestle  In 2001. Nestea.   Groups net profits: CHF 5..2 billion) Food and beverage industry: 1. Maggi..    Reminder of business. Nescafe.....       8 . Buitoni and Friskies: ~70% of sales Beverages and milk products Nutrition and ice cream Prepared dishes Cooking aids Pet care Chocolate Confectionery and biscuits Pharmaceutical products  Estimated global market share..7 billion (~USD 3.4% Processed and branded products: 2.5 billion) Annual sales: CHF 81.

Exhibit 1 9 .

92% -0.Nestle Financial Statements 2001 (In millions of Swiss Francs.54 -0.24% -3.39% 6.60% -1. CHF) Consoli ate Income Statement 1999 2000 Sale o u o e 74 660 81 422 Co o good old 35912 38121 D bu on e pen e 5268 5884 arke ng and ad n ration e pen e 23887 26467 Re earch and de elop ent co ts -893 -1038 Restructuring costs -402 -312 ortization o good ill -384 -414 ra in profit 7914 9186 Net financing cost -998 -746 Net non-trading ite s -57 -99 Profit efore taxes 6859 8341 Taxes -2314 -2761 Net profit of consoli ate companies 4545 5580 Share of profit attributable to minority interests -160 -212 Share of results of associated companies (*) 339 395 Net profit for the year 4724 5763 1999 100 00 48 10 7 06 31 99 -1 20 -0.38 -0.34% -0.08% 9.12% 10.28% -0.10% 6.85% 10 .09% 2000 100 00 46 82 7 23 32 51 -1 27 -0.19% -3.51 11.51 10.

00 7.00 10.94% 28.81% 100.001.00 11.93% 45.383.547.939.00 Other liabilities (incl.61% 22.00 T ade and other receivables 12. Employee benefits and tax liabilities) 11.915.06% 41.225.00% 2000 15.46% 19.00 16.35% 21.32% 21.00 Minority interests 625 Shareholders equity 24453 otal lia ilities an eq ity 58939 CONSO ID ED B 2000 10.168.685.00% 11 .131.11% 12.26% 20.Nestle Financial Statements 2001 (In millions of Swiss Francs.64% 100.00 Trade and other payables 9.625.10% 18.82% 1.42% 25.00 otal ssets 58.173.443.00 Inventories 7.00 609 29904 65524 1999 11.29% 19.00 18.00 13.837.07% 0.00 12. CHF) NCE SHEE 1999 Liquid assets 6.49% 100. Financial assets and goodwill) 13.00% 15.00% 16.53% 32.524.670.00 65.00 Other assets (incl.218.00 Tangible fixed assets 19.635.36% 10.00 Total debts 12.679.44% 100.

Nestle Financial Statements 2001 (In millions of Swiss Francs. CHF) C NS LI ED C SH FL W S EMEN 1 8187 -2806 -139 363 -440 253 10 -2759 -1469 -72 500 -3488 12 -2856 -7373 2000 8851 -3305 -188 355 -2846 780 146 -5058 -1657 -127 -155 921 1452 -1856 -1422 Cash flow from o erating activities Capi al e pendi ure E pendi ure on in angible asse s Sale o angible i ed asse s A uisi ions Disposals Other ove ents Cash flow from investing activities Dividend or the previous year Bonds issued/(repad) In rease (de rease) in other medium/long term debt In rease (de rease) in short term debt De rease/(in rease) in short term investments Other Cash flow from financing activities 12 .

Asia and Oceania: 19%  Swiss company had only 1% sales in Switzerland 13 .Nestle     Employees: >250..000 Factories: 508 Offices: in over 80 countries Sales were geographically spread evenly..   Europe and US: ~30% Africa.

50% 3.205 4.80% 414 384 301 140 Amorti ation of goodwill 1 6 60.376 Depreciation propert .490 6.737 2.30% 10.Nestle Financial Information ( 7 Year Re iew) In millions F (exce t for er s are ata) 2 1 1 1 7 Consoli t l s 81.186 7.50% 21.182 as % of sales 7.592 5.660 71.552 3.040 2.053 10. equipment 2.321 3.647 3.314 2.078 3.914 7.761 2.657 1.081 7.000 1.894 5.10% Taxes 2.20% 20.677 as % of sales 3.561 1.30% 19.250 5.10% 6.422 74.80% 102 1 1 4 56.10% 42 14 .597 2.724 4.103 2.763 4. plant.484 56.90% 22.70% 4.842 Consolidated net profit 5.998 Trading Profit 9.469 1.043 1.747 69.609 2.60% 3.90% 10.127 1.90% 1.90% 6.60% 9.00% 9.90% 1.00% 1.305 3.40% 5.40% 3.658 5.628 10.00% 21.057 as of sal s 11.90% as % of average equit Total amount of dividend 2.70% 23.00% 19.180 2.90% 1.30% 5.

1 8.056 5.30% 15 . 61 .05 5.18 . 5.17 1 .777 6 . 7.7 . 6 56.00% 1 5 1 4 i rity i t r sts . 7 17.806 3.30% . 86 16.675 1 .85 .029 5. 1 51. 5.1 .8 3.8 7 5.6 6 3. Equity Capital penditure as % f sales F (e ce t for er s are ata) 1 1 1 7 . 1 .1 1 .86 .815 3. 3.116 17. .1 5. 6 .567 11.86 1 .6 5 6.70% 1 . 7 1 .061 . 5 . . 0% .305 .67 1. 8. 3.10% .577 3. 1 . 6.18 1 . 5. 6 . 85 .77 58. .581 .Nestle Financial Information ( 7 Year Re iew) In millions alance s eet Curr t ss ts f i li ui ss ts N -curr t ss ts T t l ss ts Curr t li iliti s N -curr t li iliti s.1 1 .80% . 17.

55.8 3.2 58. /2.21 1 .8 Yield 1.687 Number of ersonnel In millions 16 .881 225.7/ 212.90% 33.8/2.9 43.3/ 31 .7/ 129.4 1.5 224.2/ 148. /2.6/2.Nestle Financial Information ( 7 Year Re iew) F (e ce t for er share data) 1 1 1 7 1 6 1 1 4 Consolidated net profit 1 .8 1.4/1. 63.3 3.63 9.929 231.8 8 221.2 142.5 4.172 212.7/ 349.541 230.5 2.4/2.65 2.7 1.8/ 143.65 out r tio 36.4 2.1 52.90% 32.6 Equit Di idend 5.85 8.7 % Stock exchnage prices (high/low) 389.7 1 .91 12.8/ 219.1/1.2 1.7 5.5 % 32.144 220.90% 35.1 125 1 9 1 6.37 77.8 % 31.3 254 25 .5 3 2.13 7.20% 35.

Exhibit 4 17 .

.Histor of Nestle         Began in: 1866 1905: merged with rival Anglo-Swiss Condensed Milk Company Switzerland¶s largest industrial company Growed with steady stream of acquisition 1929: bought Cailler.    Internal revenues: 2/3rd External revenues: 1/3rd Real internal growth: 4% annually 18 .. first company to mass produce chocolates 1938: Nescafe launched 1970: accused by non-governmental organizations Set targets.

Alcon      Eye care subsidiary of Nestle Founded in: 1945 Founded by: two pharmacists Specialized at: ophthalmic products By 1970   Experienced early success and continued growth Sales: $25 million   Publicly listed in 1971 1977: wholly acquired off the New York stock exchange by Nestle 19 .

...5 billion Ophthalmic pharmaceuticals Ophthalmic surgical equipments Contact lens care products Consumer eye care products  Developed. Switzerland   Top management and central R&D efforts all remained in Fort Worth 2000    World¶s leading ophthalmology company Net earnings: $331 million Sales: $2.. manufactured and marketed.     20 .   Became Swiss-domiciled company Incorporated in Hunenberg.Alcon    Held most of its IPR with Nestle in Switzerland Patents licensed to US operations which returned royalty payments 1992.

Alcon 21 .

Alcon        Not active in glasses and contact lenses areas Countries operated: 75 Employees: 11.000 Products present in: 180 countries Total sales staff: 2.200 Sales staff focused on markets outside US: 1.500 Sales and earnings generated in US: >1/2 22 .

Exhibit 5 23 .

Exhibit 6

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Exhibit 7

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L' real 2000 Financials (All numbers in Euro )
onsoli a e Balance Asse s (ne alues) Unissued share capital Good ill (note 1) Intangible fi ed assets Tangible fi ed assets Financial assets In est ents in associated companies um Fi e Asse s Current assets Unrealized translation losses o al Asse s Liabili ies Shareholders equity (after minority interests) Minority interests Provisions for liabilities and charges Loans and debts Current liabilities Unrealized translation gains o al Liabili ies ee 3 . 2.2000 0.1 506.50 4,134.60 1,611.60 230.40 1,121.90 7,605.10 6,013.40 16 13,634.50 3 . 2. 999 0.1 109.70 3,293.90 1,408.90 134.60 970.70 5,917.90 4,944.10 16.5 10,878.50

6,590.40 9.90 722.30 3,423.60 2,882.00 6.30 13,634.50

5,797.60 10.40 500.80 1,913.90 2,638.80 17.00 10,878.50

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L' real 2000 Financials (All numbers in Euro )
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Profit an Loss Accounts 2000 Net sales 12,671.20 Purchases and ariation in sto ks -2,307.40 Personnel costs -2,217.80 E ternal charges -5,988.80 Taxes other than on in o e; depre iation; charge -616.40 Operating profit 1,540.80 Exchange gains and losses -59.50 Adjusted operating profit 1,481.30 Financial expense-net -159.30 Profit before taxation of fully consolidated co pan 1,322.00 Inco e tax -488.50 Net profit before capital gains, losses, and inority interests of consolidated co panies 833.50 Groups share of net profit before cap gains, losses, and in interests of e uity affiliates 199.90 Net profit before capital gains, and losses and in 1,033.40 apital gains/losses on disposals of fixed assets; restructuring costs, goodwill a ortization -58.60 974.80 Net book profit before inority interests Minority interests -5.40 Net book rofit after minority interest 0 Net rofit before ca i tal a ins an losses an ,027. 0 Nu ber of shares outstanding Earnings per share in Euros 676,062,160 1.52

676,062,160 1.22

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10,750.70 -2,038.90 -1,882.50 -5,102.70 -460.70 1,265.90 -36.00 1,229.90 -104.60 1,125.30 -428.70 696.60 136.50 833.10 

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-40.10 793.00 -5.80 7 7.20 27.50

5 1-Dec-00 52 68% 15.19% 28.8 45.18% 100.38% 100. plant and e uipment. net of urrent maturities Long term deferred in ome ta liabilities Other long term liabilities otal shareholders e uit To al liabili ies and shareholders equi 2044 8 613 4 1138.5 240. net Intangible assets.4 3881.00% 46.23% 18. other assets otal assets Liabili ies and Shareholders Equi Current liabilities Long term debt.5 1794.5 3881.80% 29.3 1101.00% 28 .5 699. net L ng term de erred in ome ta assets.34% 2.8 84.Alcon Financials (All numbers in USD$ Balance Shee 1-Dec-00 Asse s Current assets Propert .17% 6.03% 1.

1 0.5 0.72% 8.38% 0.00% 0.88% 18. general and ad inistrative Resear h and develop ent 213.3 -2.1 805.01% 331.99% 29 .5 1.6 100.36% 33.00% 0.57% -86.73% 12.65% 0.7 Interest e pense -54.54% 246.9 2000 1999 2553.00% 554.00% 21.7 Gain(loss) fro foreign urren y.45% 44.3 8.2 In o e ta es 240.73% -3.45% 2000 100.00% 29.51% 9.46% 223 10.37% 0.4 Opera ing ncome 617.27% 0.00% 749.1 0.7 14.2 Selling.00% 86.00% 1.3 e earnings 346.39% 23.7 29.8 33.71% 0.7 24.95% 855.93% 596.1 In pro ess resear h and develop ent A orti ation of intangibles 46.72% 3.2 Other in o e (e pense): 10.Alcon Financials (All numbers in USD$ ncome S a emen 1999 Sales 2401 Cost of goods sold 719.4 Other in o e (e pense): Earnings be ore income a es 587. net Interest in o e 13.8 25.

1 21.8 107. end of year 1999 451.5 000 392. beginning of year Cash and cash e uivalents.6 -66.1 -863 -872.9 -117.3 198.1 401.8 3.2 612.2 -32.8 510.7 -99.5 912 30 . plant and e uipment Purchase of intangible assets Ac uisitions.2 -110.8 307.3 -4.8 -112.4 -15.Alcon Financials (All numbers in USD$ Cas Flo Cas lo rom o era in ac i i ies Proceeds from sale of assets Purchases of property.9 883 -2. net of cash ac uired Ne cas rom in es in ac i i ies Proceeds from issuance of long term debt Net proceeds (repayment) from short term debt Dividends to shareholder Repayment of long term debt Other Ne Cas rom inanicin ac i i ies Effect of exchange rates on cash and cash e uivalents Ne increase in cas an cas e ui alen s Cash and cash e uivalents.5 510.6 360.7 149.9 1.4 -1.

Exhibit 10 31 .

Alcon      Leader in every product category it entered Twice as large as its nearest competitor Ophthalmic products: 1/4th of $11 billion dollar global market Largest and most profitable purest ophthalmic company in the world Alcon¶s global sales...    19% of ophthalmic pharmaceutical market 45% of ophthalmic surgical market 19% of ophthalmic consumer market 32 .

Alcon  Strong commitment to R&D   Investment in R&D in last 5 years: $1 billion Accumulated patents: 1400    Prioritized managerial longevity and stability Top managements 2/3rd of compensation in phantom stock options Competitors..  Allergan. California   Shared Alcon¶s three business areas Recent announcement: spin off its ophthalmic surgical and consumer eye care businesses to create a more pure pharmaceutical company 33 ..

. of customers who could afford eye care products Ophthalmology market was relatively intensive to short-term economic cycles  10 year growth plan   More than promising R&D pipeline To become the one-stop-shop for ophthalmologists worldwide 34 .      Aging population Rising in emerging markets Increase in eye related disorders Increase in no.Alcon  In 2001  Several future growth trends reasons..

Alcon  Small part of the overall Nestle group   5% of sales 12% of EBIT    Large specialty pharma company in its own right Alcon¶s value was completely buried in food and beverage ocean (Nestle) µBest way to show the intrinsic value of this fantastic company might be to make it public to let the market decide what the real value should be¶ 35 .

7X (in line with competitors) Other businesses embedded in that multiple masked a food and beverage business that was trading at a discount to its peers ± Alcon and 26% stake in L¶Oreal 36 .Alcon     Growth rate: twice the Nestle groups growth rate Should have higher valuation multiple than Nestle group Nestle¶s EBITDA multiple: 12.

Valuation   Intrinsic differences among companies might lead to multiple differentials Alcon IPO .would help in ESOPs 37 .

Nestle would pay $10.3 billion in cash for pet food company Undertake debt reduction program after acquisition Nestle¶s current rating: AAA S&P and Moody¶s analysts put the company on its watch list Firmly kept the highest credit rating possible 38 .Guarding the Credit Rating      Early 2002 .

Discussion Question What is the natural shareholder base for a Swissincorporated company that has more than half of its sales generated in the US and its top management and research staff in Texas? 39 .

Swiss Listing       Simple to IPO Alcon in Zurich Swiss subsidiary of another Swiss company Already operated under Swiss securities laws Would simplify relations between Nestle and Alcon Minimize future administrative costs of outstanding common shares Would limit Nestle and its underwriters to the pool of capital in Switzerland 40 .

even if the shares were initially introduced in two places 41 .Dual Listing    Help target specialty pharmaceutical investors Forced to abide by US as well as Swiss securities laws ± not always consistent with each other Trading normally seemed to center on one market.

rather than Alcon. structure the board to resemble other US boards with characteristics such as staggered terms 42 . with prominent independent US business figures. AG. Inc.. Amend the incorporation documentation to conform to US standards wherever possible Create a board of directors.US Listings       Reincorporate Alcon as a US based subsidiary Fully subject to US corporate income tax Not able to claim deductions in US for royalty payments paid to Swiss parent company Management signaled that this is not an option Nestle would not move Alcon out of Switzerland Corporate governance    Rename the firm Alcon.

top management.US Listings  Financial reporting   Regularly quarterly reporting of earnings under US GAAP Dividend payments in USD by establishing a hedging facility converting dividends declared in Swiss Francs into dollar denominated payments ADR would highlight Alcon¶s foreign status Engage major settlement and custodian banks to create a share registry system to make procedures for trading shares and voting rights more like those for other US companies Keep HQs. and R&D facilities in Texas From US ± revenues: 53% and operating income: 58%  Exchange listing    Operations   43 .

American Depositor Receipts (ADR)     Most familiar instrument May be targeted by US pharma funds May be seen as candidate for international diversifications Minimizes cross-national differences in securities regulations and trading conventions 44 .

Discussion Questions Should Alcon listed. and at what price. and where? Where and how to list Alcon was secondary? What effect would a public listing of Alcon really have on the valuation and financing of the two companies involved? 45 .

Situation     Deal: divesting part of Alcon Decision on listing Nestle: Swiss firm listed in Zurich Alcon: operationally based in US 46 .

Discussion Question Assess the proposal for floatation by an investment bank and decide on location and form of Alcon¶s public offering? 47 .

Discussion Question Explore the different options available to firms in listing their shares Advantages and disadvantages Issues arising when a firm lists its shares outside its home market 48 .

Discussion Question How the market values diversified firms? What is the implied values of Nestle food¶s business after stripping out the value of Alcon? What are the possible sources of value that markets may ignore? How to the value the business units that very different risk and return characteristics? 49 .

Discussion Question How ADRs and other depositary receipts are issued? What are the motivations for and consequences of cross-border listings? 50 .

Discussion Question How segmented capital markets create financing opportunities for firms and the mechanism that evolve to take advantage of those opportunities? 51 .

Discussion Question What are Nestle¶s goal? Why does it want to spin-off Alcon? 52 .

Discussion Question Why can¶t the market recognize Alcon¶s value? Can¶t the CEO just explain it to the market? Why investors apparently do not understand such different businesses? 53 .

Discussion Question Why are some firms worth less than the sum of their parts? Why market applies a discount on conglomerate business? 54 .

Reasons for Spinning of Alcon        Market to reflect the full value of Alcon Only food and beverage analysts follow Nestle group Pharmaceutical Analyst do not consider Alcon being part of Nestle To come out conglomerate discount Paying of Nestle¶s debt to maintain stellar credit rating Can use appropriate market multiple Can use stock option to pay compensation 55 .

Listing Choices for Alcon 56 .

Listing in US (1)     Move Alcon to US and incorporate it as a US firm List in New York Sensible option ± Alcon¶s operations and its natural investor base are mainly US-based Rejected by Nestle¶s executives ± Alcon¶s IPR to be kept in Switzerland 57 .

.    US investors have to deal in foreign currency incurring higher transaction costs making the share less attractive US pension and MFs are restricted from buying foreign shares Limit Alcon¶s investors base 58 ..Listing in Swiss Mar et (2)   Switzerland is a developed market with few restrictions Drawbacks.

.Issuing an ADR (3)    List Alcon in Switzerland and issue ADR in US Still US investors have an underlying economic exposure to USD/CHF exchange rate Advantages..        59  Access more investors Broader shareholder base Increases liquidity of shares and making it less risky Good corporate governance ± filing US GAAP accounts. meeting certain standards of corporate governance Increased firm¶s valuation Cross-listed firms have higher returns and a lower cost of capital May make a firm and its products more recognizable in US May be useful as an acquisition currency .

Issuing an ADR (3)  Advantages   Easier for foreign firms to compete for managerial talent since they can offer managers stock options in the form of ADRs May also increase executive pay ± universe of comparable companies broadens to US and global firms which usually have higher levels of compensation May not retain its Swiss identity Requires more transparency in operations and results May become a takeover candidate Undermining Nestle¶s corporate culture and protection it enjoys from takeover  Disadvantages     60 .

Discussion Question Why firms issue ADRs? 61 .

Discussion Question Nestle is a global firm and only 1% of its revenues are Swiss-based then why Nestle itself is not listed on the NYSE through a sponsored ADR 62 .

Discussion Question Frequent and often substantial pricing differentials exists between a firm¶s ADR and its locally traded shares exist for firms located around the world Why this persistent differences in pricing of local stocks and their associated ADRs? Does this create arbitrage opportunities in this market? 63 .

Sta in Switzerland and Directl Listing in US (4)   Avoids potential problem of flow back since Alcon¶s shares traded only in New York Alcon will be able to fully enjoy the benefits of being a US firm with a primary listing in New York without any of the drawbacks of reincorporating as a US firm 64 .

Discussion Question How to determine the value of Alcon and the implications for the value of Nestle? 65 .

55 0.0 C IH PB SR HI H F PHI G F HRG P F PRQ P C I HH CC FC B C F C G BB CF C GE E Cadbur ch pp s Cambell Danone General M lls Heinz Kellog Kraft Nestle Unilever T 1 1 in ustr ( E EPS -Yr utur Gro t ( st.955 26.640 6.029 31.) -yr.984 26.91 2 2.700 9.0 31.) 76  ! 5 443 4443 1 22 2 ! # !% ! 443 ! # !%! 4 4 43 ! # !% ! 1 '00 (((' ) 222 ! & !% # $ ! ! ! " !    A A@ 8  9 .955 n.056 32.664 12. 188.038 1.17 2. 1.47 2.078 9.673 2. n.745 29.415 6.0 5.47 0. 1.80 n.a 9.45 1.90 18.19 66 C C . 91% n.912 1.082 97.28 1.430 6.0 9.500 50.431 8.2 1.854 28.a 462.797 46.608 7.475 2.04 .63 4.90 .855 18.a.36 1.08 . 100% 100% 100% 100% 94% n.262 33.203 18.65 4.875 51.18 1.235 18.254 21.a.929 16.484 1.662 n.Compan Comparisons (Amounts in million USD) oo an Bevera e ( &B) In ustry  C D B  % & Compan ar t Ent rpris alu EBITDA E ( st.237 17.853 33.947 14.10 11.a 5.0 10.0 5.a 6.80 19.41 1.267 13.28 n.532 50.38 2.58 1.80 54.83 1.254 30.69 3.425 6. 12.887 84.a 1.394 12.424 14.30 46.0 13.84 .408 6.178 6.201 7. 1.136 1. ) - nu s nu s nu s EPS E EPS EPS A Cap.104 19.

78 .3 17 1.128 434 222 426 448 449 25.82 X v u t X UY s rrrq i UY pp p X a Xc X X a XcX X a Xc X X d Xc Y a b X X XW S -Yr utur ro th ( st.772 620 1.15 1 .282 873 1.Company Comparisons (Amounts in million USD) harma In ustry A Company in ustry Cap.746 1.846 2.345 14.7 1 .626 1.) nu s nu s nu s S S S 1.682 14.584 9. alu -yr.567 1.175 1.64 1. 4 1.9 .94 .75 1.429 8.18 Yi Yi ( - ) rrq UY UY rrq r r rq i ehh fffe g ppp Y X Y ` % harma Mar t nt rpris BITDA ( st. om 67              € y x Allergan B usch ing Tev Forest w w ‚ 63% 15% 86% 88% 1 % 9.712 872 2.728 2.47 1. 77 1.47 .9 16.8 6.75 0.452 1. 19 1 .61 1.349 7.756 348 1.99 2.69 0.6 25 28.14 1.49 .1 23.) U V 21.8 17.39 1.

608 5.4 Kellog 100% 18.662 12.2 General Mills 100% 28.262 1.Unbundling the Value of Nestle Food and Beverage (F&B) Industry %F&B Enterprise EBITDA Company EBITDA Multiples Industry Value Cadbury Schweppes 51% 15.854 2.2 Median 10.475 11.640 11.855 1.3 Campbell 91% 16.484 18.0 Danone NA 21.082 6.7 Unilever NA 50.518 1.038 NA NA Mean 11.500 7.1 Kraft 100% 33.104 1.7 68 .912 10.511 10.254 1.0 Nestle 94% 97.138 10.9 Heinz 100% 19.

4 Company Allergan Baus & L King Teva Fores 69 ** ot included in analy sis because only 1 5% of its business is in pharmaceuticals .5 86% 1 .4 ** 1 % 2.429 88% 8.2 Median 23.128 449 31.Unbundling the Value of Nestle Pharma Company Pharma nterprise EBIT EBIT ultiples Indus ry Value 63% 9.5 Mean 24.728 434 22.6 1 % 14.1 222 426 24.345 448 18.

3 24.978.Unbundling the Value of Nestle Valuation of Nestle's Parts Enterprise EBITDA Value EBITDA Multiples Nestle F&B 78.00 13.568.6 70 Nestle¶s actual market value multiple = 12.34 7. 9 (EBITDA of 2 000) Nestle 103.662.2 Ex.249.09 683.00 NA Alcon 16.70 11.917.7x .2 L'Oreal 9.100.25 6.

as suggested by the above analysis and by Nestle executives/ Is Alcon strength hiding the weakness of the food business? 71 .Discussion Question Is the market undervaluing Nestle¶s food business.

American Depositary Receipts (ADR)   Non-US firms raising equity in US Listed on..    NYSE AMEX NASDAQ     Form of equity ownership Issued against shares represented through ADS Can be issued for more than one underlying share or for a fraction of share ± ADR ratio Reversible process 72 ..

.American Depositary Receipts (ADR)  Consideration in deciding ADR ratio  ~ matching of value of shares of US companies in the same industry by bundling a specific no. JP Morgan Other similar structures.    GDR EDR IDR 73 . of shares into one ADR    Do not eliminate currency risk Program management done by ± Citibank..

ADR Mechanics 74 .

Types of ADRs ’ Trading SEC Registration OTC market Registered Registered Registered under under Form F-6 under Form F-6 forms F1 and F6 US reporting Exempt under requirements Rule 12g3-2(b) Form 20-F Form 20-F 75 Features Can raise new capital No new capital Most eloborate form Most basic form can be issued of ADR Issuer cannot Higer liquidty and Financial raise capital statements need visibility Wide bid-ask to be prepared IPO type prospectus No SEC approval spread required as per US GAAP to be filed ’ “ “ ” ‰ ˆ Descrip i U isted Listed on a US stock exchange A EX ASDAQ NYSE Shares offered and listed on a US exchange A EX NASDAQ NYSE Pri ate placement to QIB US pri ate placement US exchange market Non US exchange Varies depending on structure of US None offering Varies depending Exempt under rule on structure of US 12g3-2(b) offering … ƒ ƒ Le el ƒ Le el Le el R le 144 G R Global offering of securities outside issuer's home market No standard structure Heterogeneous in nature ‡ † „„„ „„ „  ‘ .

.    European companies: 72% Asian Companies: 21% Latin America and Australia: 7%  Top 50 ADR programs represented > 90% of trading volume in 1999 76 .ADR Evolution   1927: first ADR created by JP Morgan for British retailer µSelfridge¶ ADRs by..

American Depositary Receipts (ADR)   Active investors: hedge funds and specialized sector funds Considerations in issuing ADRS        Visibility Broader investor base More sophisticated investor base Investor base with different preferences Access to retail investors Acquisition currency Stock options for employees 77 .

Concerns in Cross order Listing      Accounting standards and disclosure rules Efficiency of business practices Governance concerns Legal regimes Transaction costs 78 .

´ Money and Finance 2 (13-14 April-September). 79 . 2003 ³ An Empirical Study of Echnage-Traded ADRs from India.18.ADR Premium for Indian Stoc s  R. Chakrabarti. p.

Percentage Premiums on ADRs 80 .

Percentage Premiums on ADRs 81 .

Percentage Premiums on ADRs 82 .

Premiums on ADRs 83 .

.Insight  Market discipline fails in case..      Market expectations about price convergence are timebounded and market liquidity is limited Market segmentation due to different market characteristics Different market characteristics Different index membership Home bias 84 .

85 .

86 .

which would in turn issue depository receipts to investors in India Actual shares underlying the IDRs would be held by an Overseas Custodian.Issue of Indian Depository Receipts    Instrument in the form of a Depository Receipt created by the Indian depository in India against the underlying equity shares of the issuing company Foreign companies would issue shares. which shall authorise the Indian Depository to issue the IDRs 87 . to an Indian Depository (say National Security Depository Limited ± NSDL).

irrespective of the denomination of underlying shares Benefits : In addition to other avenues.Features of IDR  Overseas Custodian  It is a foreign bank having branches in India and requires approval from Finance Ministry for acting as custodian and Indian depository has to be registered with SEBI Require approval from SEBI and application can be made for this purpose 90 days before the issue opening date Listed on stock exchanges in India and would be freely transferable Overseas company intending to issue IDRs should have paid up capital and free reserve of atleast $ 100 million Sales turnover : It should have an average turnover of $ 500 million during the last three years Profits/dividend : Such company should also have earned profits in the last 5 years and should have declared dividend of at least 10% each year during this period Debt equity ratio : The pre-issue debt equity ratio of such company should not be more than 2:1 Extent of issue : The issue during a particular year should not exceed 15% of the paid up capital plus free reserves Redemption : IDRs would not be redeemable into underlying equity shares before one year from date of issue Denomination : IDRs would be denominated in Indian rupees.         88 ... IDR is an additional investment opportunity for Indian investors for overseas investment    Approvals for issue of IDRs  Listing  Eligibility conditions for overseas companies to issue IDRs.

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