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Announcement:

Moody's affirms Novartis' Aa2 rating; outlook remains negative

Global Credit Research - 16 Dec 2010

Approximately USD13.5 billion of long-term debt instruments affected

Paris, December 16, 2010 -- Moody's Investors Service has today affirmed the Aa2 long-term issuer and senior unsecured ratings of Novartis AG ("Novartis"). This follows Novartis's announcement that it has entered into a definitive agreement with Alcon, Inc. ("Alcon") to merge the two companies in return for Novartis shares and a contingent value amount ("CVA"). Novartis also intends to make share buybacks in order to reduce shareholder dilution arising from the merger. The rating outlook remains negative.

RATINGS RATIONALE

"Despite the additional cash outflow that may result from the offer to Alcon minority shareholders and the share buybacks, the affirmation of the Aa2 rating reflects Moody's expectation that Novartis will manage share buybacks with a view to restoring its credit metrics to levels that are commensurate with its current rating within 18-24 months," says Marie Fischer-Sabatié, a Moody's Vice President-Senior Analyst and lead analyst for Novartis. "In particular, this would require an improvement in Novartis's cash flow from operations (CFO)/debt to above 60%, in Moody's view," adds Ms Fischer-Sabatié.

As part of its definitive agreement with Alcon to merge the two companies, Novartis will offer to Alcon minority shareholders USD168 per Alcon share (total consideration of USD12.9 billion). This offer entails the following two components:

(i) Equity, whereby Novartis will offer to Alcon minority shareholders up to 2.8 Novartis shares for one Alcon share

(ii) A CVA, to be settled in cash, that will in aggregate equal USD168 per Alcon share.

Share buybacks will be undertaken to limit shareholder dilution and will be financed mainly through internal sources.

The merger is conditional on clearance of a registration statement by the US Securities and Exchange Commission, two-thirds approval by the shareholders of Novartis and Alcon at their respective meetings and other customary conditions. The merger is expected to be completed during H1 2011.

The Aa2 rating of Novartis also recognises Novartis's very diversified business profile -- one of the strongest among its peers -- as well as the company's strong free cash flow generation capacity (Moody's estimates that Novartis will generate at least USD6 billion of free cash flow within the next 12 months). In addition, it assumes that Novartis will maintain an adequate liquidity profile.

The negative outlook reflects the currently weak financial metrics of Novartis for a Aa2 rating, with the company to delay de-leveraging following the Alcon acquisition due to the expected additional cash outflow related to the minority buy-out. In addition, Novartis faces the patent expiry of its largest-selling drug, Diovan, in Europe in March 2011.

Future evolution of Novartis's rating and outlook will depend on the level of share buybacks to be undertaken within the coming months. Moody's could consider stabilising Novartis's outlook if and when the company is able to make significant progress towards restoring its credit metrics to levels in line with the Aa2 rating category. This would require Novartis to improve (i) its cash flow from operations (CFO)/debt ratio such that it moves above 60%; and (ii) its cash/debt ratio from its current low point to a level in the low to mid-thirties.

Downward pressure on the rating would develop if Novartis were to shift to a more shareholder-friendly financial policy, which would further delay its de-leveraging.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The principal methodology used in rating Novartis was Moody's "Global Pharmaceutical Industry Rating Methodology", published in October 2009. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

Novartis, headquartered in Basel, Switzerland, is a leading diversified healthcare company with sales of USD49 billion for the last 12 months (LTM) to September 2010.

Paris
Marie Fischer-Sabatie
Vice President - Senior Analyst
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's France SAS
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JOURNALISTS: 44 20 7772 5456
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Moody's affirms Novartis' Aa2 rating; outlook remains negative
No Related Data.
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