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CVS Health Corp. and Target Corporation Cut a Blockbuster Deal

By Todd Campbell - Jun 16, 2015 at 3:16PM

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CVS Health is acquiring Target's pharmacy business in a deal worth $1.9 billion.

Source: CVS Health.

CVS Health Corp ( CVS -0.31% ) is acquiring Target Corporation's ( TGT -1.42% ) pharmacy business for $1.9 billion in a deal that adds roughly 1,660 pharmacy locations to CVS Health's 7,800 store footprint. The deal appears to be a win for the two companies, so let's take a closer look at how each of these retailers may benefit. 

The basics
All of Target's in-store pharmacies, which include locations in 47 states, will swap over to the CVS Health nameplate once the deal closes. CVS Health will also rebrand Target's roughly 80-location network of in-store healthcare clinics as Minute Clinics.

The newly-acquired pharmacies include locations in the Seattle, Denver, Portland, and Salt Lake City markets, where CVS Health has previously been absent.

The two companies are also planning to open five to 10 small-footprint stores featuring CVS Health pharmacies inside them under the TargetExpress name. CVS Health also plans to open an additional 20 new Minute Clinics in Target stores within three years.

Most, if not all, of Target's 14,000 pharmacy employees will be offered similar positions by CVS Health; however, Target may eliminate an unspecified number of jobs at its corporate offices that will no longer be necessary after it exits the pharmacy business.

Source: Target.

The deal benefits
This acquisition significantly expands the number of stores CVS Health can leverage to negotiate deals with drug distributors and adds a significant number of new patients to whom it can cross-sell various chronic- and specialty-care programs.

It also gives the company new markets it can target with its Minute Clinics, which provide just-in-time healthcare services to patients, often for less than a typical doctor visit.

Overall, the deal increases CVS Health's annual sales by $4 billion.

To finance this purchase, CVS Health is tapping debt markets and is lopping $1 billion off its $6 billion share repurchase plan. As a result, CVS Health's adjusted EPS will be $0.06 lower next year than previously thought. However, CVS Health estimates that the acquisition will add $0.10 to the bottom line in 2017 and that it will increase EPS by at least $0.12 annually from then on. 

Target is giving up revenue, but it's also exiting an increasingly more challenging business that's under margin pressure as chains attempt to compete with the buying power of the big three operators: Walgreens Boots Alliance, CVS Health, and Rite Aid, which control more than a third of prescription market share in the United States.

The sale pads Target's balance sheet with $1.2 billion, after tax, that can be used for things like share buybacks, and it may result in greater store foot traffic because healthcare payers, including insurers and employers, may steer patients to CVS Health locations. Target will also receive between $20 million and $25 million per year in rent from CVS Health.

Target expects that this deal will be immediately accretive to its EPS and that it will boost Target's return on invested capital by a half percent, over time.

Looking ahead
Assuming government regulators don't derail this deal over anti-competitive concerns, Target and CVS Health expect that the acquisition will close by the end of this year. If so, then Target will have freed itself up to focus on its core battle against Wal-Mart, and CVS Health will have further bolstered itself against threats from Walgreen and Rite Aid. For those reasons, this deal may put both of these companies in a better position to reward shareholders down the road. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

CVS Health Corporation Stock Quote
CVS Health Corporation
$88.78 (-0.31%) $0.28
Target Corporation Stock Quote
Target Corporation
$240.39 (-1.42%) $-3.45
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$137.14 (-2.48%) $-3.49
Walgreens Boots Alliance, Inc. Stock Quote
Walgreens Boots Alliance, Inc.
$43.72 (-2.41%) $-1.08
Rite Aid Corporation Stock Quote
Rite Aid Corporation
$11.52 (-6.49%) $0.80

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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