By Silke Koltrowitz and Ludwig Burger
ZURICH (Reuters) - Novartis AG said on Thursday it would sell its nearly one-third voting stake in Roche back to its cross-town rival for $20.7 billion, disentangling the two competitors that had been linked by the investment for more than two decades.
The deal extricates Roche from ownership ties to a major rival with strategic vetoing power, though it has however kept a passive role in the face of powerful Roche family shareholders.
The transaction sent Roche shares to a record high. By mid-morning, they were up 2.4%, while Novartis shares were up 0.2%.
Novartis has agreed to sell 53.3 million Roche bearer shares for $388.99 (356.93 Swiss francs) per share, a price that reflects the volume-weighted average of the Roche non-voting equity certificates over the 20 trading days to Nov. 2, Novartis said in a statement.
In a separate statement, Roche said it will use debt to finance what it called a "disentanglement of two competitors" and plans to reduce its capital by cancelling the repurchased shares to regain full strategic flexibility.
Novartis' involvement started in 2001, when Swiss activist investor Martin Ebner, known for orchestrating the merger that created banking giant UBS , offered his Roche stake to its cross-town rival out of frustration over rebuffed proposals.
Ebner at the time had amassed the holding in Roche to push for strategic change but ran into opposition from the founding families that control the group.
Roche shareholders will vote on the plan at an extraordinary general meeting on Nov 26.
Novartis Chief Executive Vas Narasimhan said now was the right time to monetise the investment.
"Today’s announcement is consistent with our strategic focus and we intend to deploy the proceeds from the transaction in line with our capital allocation priorities," he said.
Novartis, which has taken a hands-off role as Roche investor without a director representing it on the board, said it will report a gain from the stake sale of approximately $14 billion.
It said the investment acquired for around $5 billion in 2001 and 2003 had delivered recurring earnings contributions and cumulative dividends of over $6 billion.
As per Wednesday's close, Roche's shares had a run of more than 19% so far this year for a share price gain of about 160% since Novartis' appearance on the stock register in mid-2001.
Jefferies analysts said the transaction should provide an immediate 7% boost to earnings per share and for now put to rest lingering speculation that Roche could be eyeing larger acquisitions.
For Novartis, the deal further simplifies its structure after the maker of drugs against diseases such as arthritis, cancer and multiple sclerosis in 2019 spun off the Alcon eye care business and launched a strategic review of generic-drug division Sandoz.
Roche said all holders of Roche equity securities would benefit from the earnings accretion following the transaction. It confirmed its 2021 outlook and said it was aiming to increase its 2021 dividend.
The transaction will not result in a change of control as the founding families' shareholder pool already held the majority of the votes, it said. Its voting power will increase to around 67.5% following the deal.
Roche said the Swiss takeover board had exempted the pool from the obligation to submit a mandatory offer. The free float will increase to 24.9% from 16.6%.