Caremark favors CVS pact, rebuffs Express Scripts

PHILADELPHIA – Pharmacy benefit manager Caremark Rx Inc., which plans to be acquired by drugstore chain CVS Corp. for $22.2 billion, rejected a $26 billion unsolicited bid from rival Express Scripts Inc., setting the stage for a lengthy takeover battle.

In response, Express Scripts Inc. (ESRX.O) said it would nominate four directors to the board of Caremark and also made antitrust regulatory filings to acquire stock in the company.

Express Scripts also said it had commitment letters from Citigroup Corporate and Investment Banking and Credit Suisse, showing it could fully finance its cash and stock offer.

Express Scripts said it would prefer to meet with the Caremark board and management to negotiate a deal, but it was taking action in light of Caremark’s rejection and refusal to discuss the offer.

Caremark said late on Sunday that the unsolicited Express Scripts stock-and-cash proposal “does not constitute, and is not reasonably likely to lead to, a superior proposal.”

The Express Scripts’ proposal, said Caremark, lacked strategic rationale, faced significant antitrust risks and potential delays in closing the deal, and carried the risk of hefty debt load for the combined company.

“If it was just price, they could try to throw in a few dollars. But they were told (by Caremark) that a deal with them made no strategic sense, so they have to fight at a strategy level — at the board and management level,” said one arbitrageur, who declined to be named.

Despite the lower price, Caremark said it favored the CVS pact since it had few integration risks and significant opportunities for synergies between the two companies.

“We believe that Caremark investors view the price offered by CVS as inadequate,” said Wachovia Capital Markets analyst Matt Perry. “This overrides any other concerns about the Express Scripts offer at the current time. If (a) vote were held today, we would expect Caremark holders to reject CVS.”

In November, CVS agreed to buy Caremark in a move to expand its prescription benefits and mail-order business. At the time of the announcement, the CVS deal offered no premium over the price of Caremark’s stock.

Caremark and other pharmacy benefit managers administer prescription drug benefits for employers and major health plans, brokering deals in part by buying medicines in bulk from manufacturers. They also have large pharmacies that deliver prescriptions through the mail.

Traditional pharmacies face competition from mail-order operations, which are eroding the business of retail chains by siphoning off customers who buy medicines and also shop for other items while waiting at the stores.

CVS said on Monday it was pleased that Caremark reaffirmed its commitment to the deal. Nashville-based Caremark said its deal with CVS had already received antitrust clearance and the companies expected to close the transaction by the end of the first quarter of 2007.

ANTITRUST

CONCERNS

“We believe that customers are likely to benefit economically from a Caremark-Express Scripts combination, which may override any initial market share concentration/ anti-competitive concerns,” Susquehanna Financial Group analyst Constantine Davides said.

In addition to raising antitrust concerns, Caremark said the proposal from Express Scripts created the risk of significant customer attrition and destruction of shareholder value.

The Express Scripts plan would also result in a “highly leveraged and weakened business” with diminished financial strength, it added.