Bloomberg News

Express Scripts Agrees to Buy Medco for $29.1 Billion

July 21, 2011

(Updates with closing share prices in ninth paragraph.)

July 21 (Bloomberg) -- Express Scripts Inc. agreed to buy Medco Health Solutions Inc. for $29.1 billion in the largest deal in at least a decade among U.S. companies that manage prescription-drug benefits.

The $71.36-a-share offer in cash and stock is 28 percent more than Medco’s $55.78 closing price yesterday. Investors in the Franklin Lakes, New Jersey-based company will get $28.80 in cash and 0.81 of an Express Scripts share for each Medco share they own at the closing, the companies said in a statement.

Buying Medco gives St. Louis-based Express Scripts the scale to become dominant among companies that handle drug benefits for corporate and government clients. Medco also said today it lost an $11 billion contract with insurer UnitedHealth Group Inc. that accounted for 17 percent of its business. The loss drops Medco to No. 3 in the industry, trailing Express Scripts and CVS CareMark Corp.

“Wow, I didn’t see this coming,” said Art Henderson, an analyst at Jefferies & Co. in Nashville, Tennessee, in an e-mail today. “There are unbelievable synergies here, but I am sure this will go through a lengthy” review by U.S. regulators.

The accord came together quickly, with talks starting several weeks ago, according to three people familiar with the agreement who declined to be identified because the negotiations were private. Previous discussions about a potential merger helped accelerate the deal, the people said.

Deal Negotiations

Medco executives and advisers contacted Express Scripts to let them know they were open to a sale because of their concerns about contracts Medco had lost in the last year, and they feared CVS-Caremark Corp. might sell its pharmacy unit to Express Scripts, the people said.

The Medco takeover, once completed, will surpass the $21.7 billion agreement that formed CVS Caremark in 2007 as the largest in the industry in a decade. CVS won the deal after the Federal Trade Commission began an inquiry into possible anti- competitive aspects of a rival bid by Express Scripts.

The agreement announced today with Medco will get “a very, very close look” by regulators before it’s closed, said Bob Leibenluft, who led the FTC’s health unit from 1996 to 1998 and is now a partner at Hogan Lovells LLP, a Washington law firm.

Medco surged $8.05, or 14 percent, to $63.83 at 4 p.m. in New York Stock Exchange composite trading. Express Scripts increased $2.82, or 5.4 percent, to $55.36. CVS gained 87 cents, or 2.4 percent, to $37.82.

The overall final value of the deal will depend on the price of Express Scripts at the closing, the companies said.

Paz Sees Approval

Chief Executive Officer George Paz of Express Scripts said on a conference call with analysts that the companies wouldn’t have combined “unless we thought it would be approved” by the FTC. “We believe we will work our way successfully through the regulatory approval process,” he said.

The pitch to regulators will be that Medco is mostly national accounts and Express is more local and small businesses, and that UnitedHealth is going to be a strong No. 3, the person familiar said.

Under the agreement between the two companies, no termination fees will be paid if the deal doesn’t get U.S. regulatory clearance. The FTC will review whether pharmacy benefit managers owned by insurers, as well as regional and niche companies, can provide enough competition to keep prices low, the former FTC official Leibenluft said.

FTC Scrutiny

“It will be challenging to get this past the FTC,” Sanford Bernstein’s Wolk said. “But with the growth of UnitedHealth,” an insurer with its own pharmacy services unit, “we will be back to having three dominant players.”

Pharmacy benefit managers negotiate drug prices for employer and government insurance plans and manage worker claims. A company that combines Medco and Express Scripts would control about 30 percent of the market by 2013, said Helene Wolk, an analyst at Sanford Bernstein in New York.

CVS CareMark, based in Woonsocket, Rhode Island, will control “in the low 20s” of the market, while UnitedHealth’s unit will grow to the “low teens,” she said.

Express Scripts and Medco historically have had different cultures, Wolk said. Medco is more strategic and takes a long- term approach to business while Express Scripts tends to have a short-term, financially driven vision, she said.

Contract Losses

Medco, led by Chairman and Chief Executive Officer David Snow, has lost $3.5 billion in contracts since March. The share have declined 13 percent since May 26, the day before the company announced loss of a $3 billion contract covering 9.8 million mail-order prescriptions. In March, the company failed to renew a $500 million contract with the California Public Employees Retirement System.

David Larsen, an analyst at Leerink Swann & Co. in Boston, estimated in a note today that Express Scripts is paying 9.1 times Medco’s 2012 estimated earnings before interest, taxes, depreciation and amortization, excluding the UnitedHealth contract and potential cost savings.

About $1 billion in cost savings has been identified to date and the deal is expected to be “slightly accretive in the first year after the deal close and moderately accretive once fully integrated,” Larsen said in the note. CVS Corp. paid 12.2 times Ebitda for Caremark Rx Inc. in 2007.

‘Wildest Speculation’

“People in their wildest speculation thought that, maybe in 2013, after Medco lost UnitedHealth, it could merge with Express Scripts, but frankly no one put a lot of stock in it,” Bernstein’s Wolk said.

Credit Suisse AG and Citigroup Inc. provided financial advice to Express Scripts, while Skadden, Arps, Slate, Meagher & Flom, LLP gave legal counsel. Medco’s co-lead financial advisers were JPMorgan Chase & Co. and Lazard, with Sullivan & Cromwell LLP as legal adviser and Dechert LLP as regulatory counsel.

The deal for Medco would be the second-largest this year in the U.S., after AT&T Inc.’s $39 billion planned acquisition of T-Mobile USA Inc. The Wall Street Journal reported the transaction earlier today.

Medco and Express Scripts also reported second-quarter earnings. Express Scripts earned 71 cents a share, excluding some items, matching the average analyst estimate compiled by Bloomberg. The company reaffirmed its forecast for this year of $3.15 to $3.25 a share. Analysts are predicting $3.19, the average of 25 estimates compiled by Bloomberg.

Medco posted second-quarter profit excluding some costs of 96 cents a share, beating the average analyst estimate of 94 cents.

--With reporting by Kristen Hallam in London, Molly Peterson and Jeff Bliss in Washington, and Jeffrey McCracken in New York. Editors: Bruce Rule, Reg Gale

To contact the reporter on this story: Pat Wechsler in New York at pwechsler@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net


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