nestle and alcon _ the value of a

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Nestle and Alcon – The Value of a Listing

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Nestle Financial Statements 2001 (In millions of Swiss Francs, CHF)

1999 2000 1999 2000Sales to customers 74,660 81,422 100.00% 100.00%Cost of goods sold -35912 -38121 -48.10% -46.82%Distribution expenses -5268 5884 -7.06% 7.23%Marketing and administration expenses -23887 -26467 -31.99% -32.51%Research and development costs -893 -1038 -1.20% -1.27%Restructuring costs -402 -312 -0.54% -0.38%Amortization of goodwill -384 -414 -0.51% -0.51%Trading profit 7914 9186 10.60% 11.28%Net financing cost -998 -746 -1.34% -0.92%Net non-trading items -57 -99 -0.08% -0.12%Profit before taxes 6859 8341 9.19% 10.24%Taxes -2314 -2761 -3.10% -3.39%Net profit of consolidated companies 4545 5580 6.09% 6.85%Share of profit attributable to minority interests -160 -212Share of results of associated companies (*) 339 395Net profit for the year 4724 5763

Consolidated Income Statement

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1999 2000 1999 2000Liquid assets 6,670.00 10,131.00 11.32% 15.46%Trade and other receivables 12,443.00 12,685.00 21.11% 19.36%Inventories 7,383.00 7,168.00 12.53% 10.94%Tangible fixed assets 19,218.00 18,625.00 32.61% 28.42%Other assets (incl. Financial assets and goodwill) 13,225.00 16,915.00 22.44% 25.81%Total Assets 58,939.00 65,524.00 100.00% 100.00%Trade and other payables 9,635.00 10,001.00 16.35% 15.26%Total debts 12,547.00 13,173.00 21.29% 20.10%Other liabilities (incl. Employee benefits and tax liabilities) 11,679.00 11,837.00 19.82% 18.07%Minority interests 625 609 1.06% 0.93%Shareholders equity 24453 29904 41.49% 45.64%Total liabilities and equity 58939 65524 100.00% 100.00%

CONSOLIDATED BALANCE SHEET

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1999 2000Cash flow from operating activities 8187 8851Capital expenditures -2806 -3305Expenditure on intangible assets -139 -188Sale of tangible fixed assets 363 355Acquisitions -440 -2846Disposals 253 780Other movements 10 146Cash flow from investing activities -2759 -5058Dividend for the previous year -1469 -1657Bonds issued/(repad) -72 -127Increase (decrease) in other medium/long term debt 500 -155Increase (decrease) in short term debt -3488 921Decrease/(increase) in short term investments 12 1452Other -2856 -1856Cash flow from financing activities -7373 -1422

CONSOLIDATED CASH FLOW STATEMENT

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Exhibit 4

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Exhibit 5

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Exhibit 7

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Alcon Financials (All numbers in USD$

31-Dec-00 31-Dec-00AssetsCurrent assets 2044.8 52.68%Property, plant and equipment, net 613.4 15.80%Intangible assets, net 1138.8 29.34%Long term deferred income tax assets, other assets 84.5 2.18%Total assets 3881.5 100.00%Liabilities and Shareholders EquityCurrent liabilities 1794.5 46.23%Long term debt, net of current maturities 699.8 18.03%Long term deferred income tax liabilities 45.5 1.17%Other long term liabilities 240.3 6.19%Total shareholders equity 1101.4 28.38%Total liabilities and shareholders equity 3881.5 100.00%

Balance Sheet

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1999 2000 1999 2000Sales 2401 2553.6 100.00% 100.00%Cost of goods sold 719.1 749.7 29.95% 29.36%Selling, general and administrative 805.2 855.8 33.54% 33.51%Research and development 213.1 246.3 8.88% 9.65%In process research and development 18.5 0.00% 0.72%Amortization of intangibles 46.4 86.5 1.93% 3.39%Operating Income 617.2 596.8 25.71% 23.37%Other income (expense): 0.00% 0.00%Gain(loss) from foreign currency, net 10.7 0.1 0.45% 0.00%Interest income 13.7 44.1 0.57% 1.73%Interest expense -54.4 -86.3 -2.27% -3.38%Other income (expense): 0.00% 0.00%Earnings before income taxes 587.2 554.7 24.46% 21.72%Income taxes 240.3 223 10.01% 8.73%Net earnings 346.9 331.7 14.45% 12.99%

Income Statement

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1999 2000Cash flow from operating activities 451.8 392.8Proceeds from sale of assets 3.7 107.9Purchases of property, plant and equipment -99.4 -117.1Purchase of intangible assets -15.2Acquisitions, net of cash acquired -863Net cash from investing activities -110.9 -872.2Proceeds from issuance of long term debt 1.3 612.8Net proceeds (repayment) from short term debt 198.8 307.3Dividends to shareholder -112.6 -4.2Repayment of long term debt -66.1 -32.9OtherNet Cash from finanicing activities 21.4 883Effect of exchange rates on cash and cash equivalents -1.6 -2.1Net increase in cash and cash equivalents 360.7 401.5Cash and cash equivalents, beginning of year 149.8 510.5Cash and cash equivalents, end of year 510.5 912

Cash Flow

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Exhibit 10

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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

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Listing Choices for Alcon

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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..,

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

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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

Disadvantages 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

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Unbundling the Value of Nestle

Company%F&B

IndustryEnterprise

Value EBITDAEBITDA

MultiplesCadbury Schweppes 51% 15,518 1,511 10.3Campbell 91% 16,254 1,475 11.0Danone NA 21,854 2,138 10.2General Mills 100% 28,104 1,484 18.9Heinz 100% 19,855 1,912 10.4Kellog 100% 18,262 1,640 11.1Kraft 100% 33,082 6,608 5.0Nestle 94% 97,500 7,662 12.7Unilever NA 50,038 NA NA

Mean 11.2Median 10.7

Food and Beverage (F&B) Industry

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Company% PharmaIndustry

EnterpriseValue EBITDA

EBITDAMultiples

Allergan 63% 9,728 434 22.4Bausch & Lomb** 15% 2,150 222King 86% 10,429 426 24.5Teva 88% 8,345 448 18.6Forest 100% 14,128 449 31.5

Mean 24.2Median 23.4

Pharma Company

** Not included in analysis because only 15% of its business is in pharmaceuticals

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EnterpriseValue EBITDA

EBITDAMultiples

Nestle F&B 78,249.25 6,978.70 11.2L'Oreal 9,100.00 NAAlcon 16,568.09 683.3 24.2 Ex. 9 (EBITDA of 2000)

Nestle 103,917.34 7,662.00 13.6

Valuation of Nestle's Parts

Nestle’s actual market value multiple = 12.7x

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ADR Mechanics

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Types of ADRsLevel I Level II Level III Rule 144 A GDR

Description UnlistedListed on a US stock exchange

Shares offered and listed on a US exchange

Private placement to QIB

Global offering of securities outside issuer's home market

Trading OTC market

AMEXNASDAQNYSE

AMEXNASDAQNYSE

US private placement market

US exchangeNon US exchange

SEC Registration

Registered under Form F-6

Registered under Form F-6

Registered under forms F1 and F6 None

Varies depending on structure of US offering

US reporting requirements

Exempt under Rule 12g3-2(b) Form 20-F Form 20-F

Exempt under rule 12g3-2(b)

Varies depending on structure of US offering

Features

Most basic formIssuer cannot raise capitalWide bid-ask spread

No new capital can be issuedFinancial statements need to be prepared as per US GAAP

Can raise new capitalMost eloborate form of ADRHiger liquidty and visibilityIPO type prospectus to be filed

No SEC approval required

No standard structureHeterogeneous in nature

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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

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Concerns in Cross Border Listing

Accounting standards and disclosure rules Efficiency of business practices Governance concerns Legal regimes Transaction costs

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ADR Premium for Indian Stocks

R. Chakrabarti. 2003 “ An Empirical Study of Echnage-Traded ADRs from India.” Money and Finance 2 (13-14 April-September), p.18.

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Percentage Premiums on ADRs

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Premiums on ADRs

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Insight

Market discipline fails in case.., Market expectations about price convergence are time-

bounded and market liquidity is limited Market segmentation due to different market

characteristics Different market characteristics Different index membership Home bias

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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, to an Indian Depository (say National Security Depository Limited – NSDL), which would in turn issue depository receipts to investors in India

Actual shares underlying the IDRs would be held by an Overseas Custodian, which shall authorise the Indian Depository to issue the IDRs

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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

Approvals for issue of IDRs Require approval from SEBI and application can be made for this purpose 90 days before the issue opening date

Listing Listed on stock exchanges in India and would be freely transferable

Eligibility conditions for overseas companies to issue IDRs.., 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, irrespective of the denomination of underlying shares Benefits : In addition to other avenues, IDR is an additional investment opportunity for Indian investors for overseas

investment

nestle and alcon _ the value of a

Documents

consoli t

f sales f e ce t

millions f exce t

financial assets

net profit of consoli

trading ite s

consolidated net profit

sale o u o e