Caremark bids

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Is Caremark blinded by its vision? There is a taste of that in the drug benefits manager’s strongly worded rejection of the hostile $26bn approach from smaller rival Express Scripts. Caremark is sticking with its plan to transform the industry by merging with retail pharmacy chain CVS.

The average Caremark shareholder might raise an eyebrow. CVS is offering all stock and no premium but the deal actually feels more like a takeover than a merger of equals. By contrast, more than half the Scripts offer is in cash. Adding in the stock component gives Caremark shareholders a premium over the CVS deal of about 13 per cent.

Caremark says the combination with CVS would take advantage of the changing US healthcare landscape, generating growth and financial benefits in the future – and that customers have welcomed it. Investors, however, are having more trouble understanding the vision. The simpler deal with Scripts might be less imaginative but it is easier to grasp the potential benefits.

Both combinations claim $500m of annual cost savings (now that CVS and Caremark have unearthed an extra $100m of synergies). Both face integration challenges. The Scripts deal could run into antitrust delays but ultimately looks likely to be approved. The bigger risk is that the company, with a market capitalisation of less than $10bn, needs to take on some $13bn of debt. That leaves the Scripts offer somewhere between a strategic acquisition and a leveraged buy-out.

But LBOs are setting valuation benchmarks these days. While the Scripts premium is hardly a knock-out, at least it represents close to the capitalised value of the synergies up front (and partly in cash). CVS, in contrast, is only offering to share the benefits over time. If Caremark’s board really prefers the “vision thing”, it should at least make CVS pay up.

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