Retail drug store operator CVS Corp. (CVS) on Thursday revised its offer for Caremark Rx, Inc. (CMX), the second-largest U.S. manager of employee drug benefits, terming it as "best and final". CVS said the two companies have agreed to increase the special cash dividend payable to Caremark shareholders, following closing of the merger, to $7.50 per share. Also, soon after the merger, CVS/Caremark will commence a cash tender offer for 150 million or about 10% of its outstanding shares at a fixed price of $35 per share. In a separate statement, Caremark said the latest offer from CVS makes an already compelling transaction even more attractive for Caremark shareholders.
This is the third time that CVS has boosted its offer for Caremark. The latest offer adds $1.50 to the dividend it had earlier agreed to pay Caremark shareholders. The total offer is now valued at $62.19 per share in cash and stock.
CVS and pharmacy benefit management service provider Express Scripts Inc. (ESRX) are actively pursuing to acquire Caremark since November 2006. CVS said on November 1 that it planned to acquire Caremark for about $21.2 billion in stock. Next month, Express Scripts made a $26 billion stock and cash bid, which was rejected by Caremark. Subsequently, CVS sweetened the bid with a $2 per share cash dividend on the stock.
On February 13, CVS offered to give $6 per share cash dividend, thus bringing the CVS offer close to the original proposal made by Express Scripts. On Wednesday, Express Scripts revised its offer to $29.25 in cash and 0.426 shares of Express Scripts stock for each share of Caremark stock. The company also offered to pay an additional cash consideration of approximately 6% per annum on the $29.25 cash portion of its offer. The latest offer from Express Scripts values Caremark at about $62.57 per share. However, Express Scripts added that it expects a "second request" from the Federal Trade Commission with regard to the impact of the acquisition on the cost of drug benefits, which CVS thinks are anti-trust concerns about the bid.
Caremark has become a coveted target due to its positioning in the industry. It services more than 2,000 health-plan sponsors and their plan participants. Acquiring Caremark would give any of the two companies access to members of Medicare's prescription drug plan, whereby the acquiring company can market its front-end retail business directly to Caremark's members. The merger would also serve to face generic competition from benefits managers like Wal-Mart Stores Inc. (WMT).
The original terms of the CVS/Caremark merger agreement remain unchanged, the company said today. As per the agreement, Caremark shareholders will receive 1.67 shares of CVS/Caremark stock for each share of Caremark they own. On a pro forma basis, CVS stockholders will own 54.5% of CVS/Caremark and Caremark shareholders will own 45.5%.
Urging Caremark shareholders to recognize the value and benefits of the deal, the second-biggest U.S. drugstore chain said the CVS/Caremark merger would be solidly accretive to earnings and cash flow in 2008. The combined company is also expected to retain a solid investment grade rating. CVS said the $35 per share tender offer price underlines its confidence in the compelling long-term value proposition of the CVS/Caremark combination. CVS received antitrust clearance for the offer on December 20.
A special meeting of shareholders of Woonsocket, Rhode Island-based CVS will be held on March 15 to approve the transaction. A special meeting of the Caremark shareholders is scheduled for March 16 for the same purpose. Since the transaction has received all regulatory approvals, if the shareholders of both companies approve, the deal can close in mid-March.
Commenting on the rival offer by Express Scripts', Tom Ryan, Chairman, President and CEO of CVS, said: "The Express Scripts' offer for Caremark remains fraught with risk, challenges and certain loss of shareholder value. In contrast, our best and final merger proposal provides Caremark shareholders with real and deliverable value and is based on a compelling strategic rationale.
Commenting on the new offer from CVS, Caremark said in a separate statement that near-term cash value has been increased by $3.2 billion since the merger was originally announced, while the $5.25 billion post-closing tender offer would increase the earnings accretion of this powerful combination. The company said it will look forward to promptly closing the merger and beginning to realize the long-term strategic and financial value of this ground-breaking merger."
Board of directors of Caremark, in a meeting today, approved the enhancements to the CVS merger and unanimously reaffirmed its recommendation that Caremark stockholders vote for the merger. The board also said after thorough consideration and consultation with its legal and financial advisors, it determined that the amended proposal from Express Scripts is not a superior proposal.
Stock Movement
CVS, which has been trending in the range of $27.09 - $36.14 for the past one year, closed Thursday's regular trading session at $32.41, up $1.09 or 3.48%, on 49.68 million shares. In the extended trade, however, the stock dropped 6 cents and traded at $32.35.
CMX traded at $62.16, up $0.86 or 1.40%, on 24.78 million shares at the close of regular trade on Thursday.
ESRX closed the regular session on Thursday at $76, up $1.23 from the previous close, on 7.53 million shares. In the extended trade, the stock gained 7 cents and traded at $76.07.
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