While private equity investors are perfecting the art of the leveraged buyout, Express Scripts
Before Express Scripts (the third-largest pharmacy benefits manager, or PBM, in the country) proposed the acquisition of its larger competitor, Caremark RX
Financially speaking, Express Scripts' offer is stronger. The deal, valued at $26 billion, is split between $29.25 in cash and 0.426 shares of Express Scripts, for a combined $58.50 for each Caremark share using today's share prices. CVS's offer is valued at $50 for each Caremark share, which is an all-stock offer, exchanging each Caremark share for 1.67 shares of CVS. Express Scripts' offer is a 17% premium to CVS's offer.
But nothing comes cheap, and the downside to such a premium offer is that Express Scripts will burden itself with an additional $13.4 billion in debt to fund the acquisition. CVS's all-equity offer saves itself from weakening an already stretched balance sheet.
Considering operations, both companies will gain economies of scale and benefit from increased purchasing power. I'm not sure how much one-upmanship is going on, but Express Scripts claimed in its investor presentation that it can generate $500 million in synergies, $100 million more than CVS's $400 million. Let's just say that the PR battle is beginning to heat up.
This Fool's thoughts
As an investor, I think Express Scripts' shareholders currently have the best deal. With half of the purchase price funded by debt, much of the realized value will remain with Express Scripts. Furthermore, the synergies have a better chance of being realized by staying within the same business model. Express Scripts is also being proactive by keeping itself from being a target for acquisition. However, there are drawbacks, including possible regulatory hiccups due to anti-trust concerns and the $675 million break-up fee it would ultimately cough up to CVS.
As a CVS shareholder, I wouldn't be surprised if the board comes up with a cash sweetener to match the $59 offer. CVS has proven that it knows how to acquire businesses, which has been a large source of its growth over the last decade. However, I hope the company is mindful of Rite Aid's
Stay tuned ... this is far from over.
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