Markets & Finance

Express Scripts' Bold Formula for Caremark


The company's $26 billion takeover offer is a big bet that the combo could realize significant cost savings

Express Scripts (ESRX) said Dec. 18 it is offering about $26 billion for Caremark Rx (CMX), throwing a wrench into the pharmacy benefit management company's merger agreement with CVS Corp. (CVS) announced in November.

It could turn into another of the market's nastier takeover deals.

Investors have worried in recent months about the potential that lower prices on prescription drugs might have on pharmacy benefit management services companies like Nashville's Caremark and the St. Louis-based Express Scripts, which provides services to client groups ranging from insurance carriers to the public sector. Express Scripts CEO George Paz is aiming to make his company more efficient and to improve his ability to compete in a fast changing market. If his proposal goes through, his deal would close in the third quarter of 2007.

"Together, we will have the size, scale and financial strength to expand the markets we serve and enhance our value proposition and, thus, our competitive position," Paz said in a statement. "The collective resources of our two organizations will benefit plan sponsors and patients through greater use of cost-effective generic and lower cost brand drugs, specialty pharmacy, home delivery and flexible retail networks."

Express Scripts would pay $29.25 in cash and 0.426 shares of Express Scripts stock for each share of Caremark stock. The offer is structured so that the receipt of the stock portion will be tax free to Caremark stockholders, who would end up owning about 57% of the company while Express Scripts has the rest. The company has received commitment letters from Citigroup Corporate and Investment Banking and Credit Suisse to fully finance the proposed transaction.

Paz estimates that a combination would save about $500 million per year. He says the two companies would generate more than $2.7 billion earnings before interest taxes depreciation and amortization in 2006 as a combined entity. Once the transaction closes, he thinks the deal would have a neutral affect on earnings per share in the first year and grow earnings "significantly" thereafter.

Investors responded by selling Express Scripts shares 1.8% to $67.44 per share in early trading on the Nasdaq. But Caremark's stock price gained 9.4% to $55.01 per share on the New York Stock Exchange.

Paz's offer represents a 22% premium over $47.99, the average closing price of Caremark since the announcement of the proposed acquisition of Caremark by CVS on Nov. 1.

CVS' stock price fell 1.4% to $30.10 per share in early trading on the New York Stock Exchange Dec. 18.

CVS, best known for its retail drugstore business, has a pharmacy benefits management business under its PharmaCare organization. The company had snared a deal with Caremark for approximately over $20 billion. The two had wanted to form a new company called CVS/Caremark and headquartered in Woonsocket (R.I.), with a combined pharmacy services business that would operate out of Nashville (Tenn.).

CVS CEO Tom Ryan has been looking for ways to make his company more efficient and increase the scope of his pharmacy benefits management business. The merger would also have transformed Caremark from a tough rival into an ally. But dubious investors gave the deal a thumbs down; CVS' stock price slid 8.2% to $28.18 per share on the New York Stock Exchange, while Caremark shed 3.1% to $47.73 per share after its announcement.

Express Scripts' offer is contingent on the termination of CVS'. "We would unquestionably prefer to work cooperatively with you to complete a negotiated transaction that would produce substantial benefits for our respective stockholders. Alternatively, we are prepared to take our transaction directly to your stockholders," Paz wrote in a letter to Caremark's board. "In this regard, you should also know that we are prepared to solicit proxies against approval of your proposed merger with CVS."

Caremark declined to comment.

CVS said on Dec. 18 that it has an agreement with Caremark that would be a merger of equals transaction. "We have not yet had an opportunity to review this offer carefully," CVS said in a press release Dec. 18. "We believe the prospects for completing that transaction are excellent and we remain confident in the long- term strategic value of our combination as well as the benefit to shareholders of CVS and Caremark."

Merger and acquisition activity has been getting so heated in recent months, more companies are taking the with hostile approach. Lonnie "Bo" Pilgrim, founder of chicken producer Pilgrim's Pride Corp. in Pittsburg, Texas, lobbied a four-month-long proxy battle for his rival, the Atlanta-based poultry processor Gold Kist Inc. He won with a $1.1 billion offer announced in December. In Sweden, the truckmaker Scania is fighting off a bid by German rival MAN. On Dec. 12, Nasdaq Stock Market formally made a $5 billion hostile bid for the London Stock Exchange.


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