Express Scripts Makes $26 Billion Hostile Bid for Caremark

Pharmacy-benefit manager Express Scripts (ESRX) launched a hostile $26 billion bid Monday to acquire its larger competitor Caremark Rx (CMX), potentially scuttling a competing offer from the CVS (CVS) drug store chain. The deal, if approved, may help cut drug prices for consumers.

The race to consolidate in the drug industry comes as the pressure to lower prices is growing. Wal-Mart Stores Inc. (WMT) recently announced it would sell some generic drugs for $4, and rival retailer Target Corp. (TGT) has a similar program. That leaves companies like Express Scripts and Caremark Rx, who act as middlemen between drug companies and employees, to struggle to reduce costs.

Express Scripts Inc. proposed to pay $29.25 in cash and 0.426 shares of its stock for each share of Caremark stock. The company said that equals $58.50 per Caremark share, based on Express Scripts' Friday's closing price.

Shares of Caremark rose $5.88, or 11.7 percent, to $56.18 on the New York Stock Exchange, and Express Scripts shares rose 69 cents to $69.35 on the Nasdaq Stock Market

CVS Corp., the nation's largest operator of drugstores and second to Walgreen Co. in sales, said on Nov. 1 that it planned to acquire Caremark Rx Inc. for about $21.2 billion in stock. It said that the deal would save $400 million annually.

Express Scripts said its proposed combination with Caremark would save $500 million a year.

Express Scripts officials didn't specify where the additional $100 million in savings would come from, but they expressed confidence in finding it.

"We believe we have the power and the roadmap to find it," said George Paz, president, CEO and chairman of Express Scripts. "We believe the offer we put on the table is truly a superior deal and we feel it is going to stand on its on two feet."

Nashville, Tenn.-based Caremark said in a statement on Monday that it continues to be bound to the merger agreement with CVS Corp. and that "the parties anticipate filing a joint proxy statement with the Securities & Exchange Commission shortly."

Woonsocket, R.I. based CVS issued a statement saying the company hasn't had an opportunity to review the Express Scripts offer but added that it has a "definitive" agreement with Caremark.

"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," the statement said.

CVS shares slipped 55 cents to $29.97 on the New York Stock Exchange Monday.

If the Express Scripts proposal goes through, Caremark stockholders would own approximately 57 percent of the combined company, and Express Scripts stockholders would own approximately 43 percent. The combination will create the world's pre-eminent pharmacy benefit management company, Express Scripts said.

Andrew Speller, an analyst with A.G. Edwards & Sons in St. Louis, said the deal would help Express Scripts gain market share in an industry where size and scale are critical.

"Any time you have an opportunity to get bigger, that is a positive situation," Speller said.

If the deal is approved, Express Scripts would take on a debt load that would be roughly quadruple its annual cash flow. But Speller said the company was in a similar position in 1999 after an acquisition and should be able to carry the debt.

He said the offer might be appealing to Caremark shareholders because of the upfront cash component and because Express Scripts is offering a premium. Some shareholders were not pleased with the CVS offer, he said.

"You've got disgruntled people from the Caremark standpoint that are getting value from Express Scripts offer," said Speller, adding that a counter offer from CVS is almost certainly forthcoming.

John Ransom, an analyst with Raymond James & Associates, agreed that CVS may try to sweeten its deal.

"With an offer now on the table, CVS could boost the purchase price, as we perceive the strategic benefits of the deal as greater for CVS," Ransom said.

Express Scripts said it has arranged financing from Citigroup's corporate and investment banking units and from Credit Suisse.

Maryland Heights, Mo.-based Express Scripts is half the size of Caremark. The two companies are the third- and second-largest pharmacy benefit management companies.