Fitch Affirms CVS Caremark’s IDR at ‘BBB+’ Post Longs Acquisition Announcement
Fitch Ratings, New York
Monica Aggarwal, CFA, +1-212-908-0282
Karen Ghaffari, CFA, CPA, +1-212-908-0708
Cindy Stoller, +1-212-908-0526 (Media Relations)
Fitch Ratings has affirmed its ratings on CVS Caremark Corp. (CVS Caremark; NYSE:CVS) following the announcement that it has entered into a definitive agreement to acquire Longs Drug Stores Corporation (Longs; NYSE:LDG). The ratings are as follows:
–Long-Term Issuer Default Rating (IDR) at ‘BBB+’;
–Senior unsecured bank facility at ‘BBB+’;
–Senior unsecured notes at ‘BBB+’;
–ECAPS hybrid security at ‘BBB’;
–Short-Term IDR at ‘F2′;
–Commercial paper at ‘F2′.
The Rating Outlook is Stable. CVS Caremark had $9.4 billion in debt outstanding as of June 28, 2008.
CVS Caremark will offer to acquire Longs for $71.50 per share for a total purchase price of $2.9 billion, including net debt. CVS Caremark expects to fund the acquisition with a $1.5 billion bridge loan facility, existing cash and commercial paper borrowings. In addition, Longs owns approximately 200 store locations, three distribution centers and three office facilities and CVS Caremark could monetize a substantial portion of these assets over time. The transaction is subject to a tender offer which will be commenced shortly and regulatory approval and is expected to close in the fourth quarter of 2008.
Longs is the largest regional store operator in the United States with 521 retail drug stores in California, Hawaii, Nevada and Arizona, and generated revenue of $5.4 billion and EBITDA of approximately $276 million in the latest 12-month period ending May 1, 2008. Longs has approximately 450 locations in Northern and Central California, with a No.1 share in 10 (non-CVS markets) of the top 100 U.S. drugstore markets. These locations complement CVS Caremark’s retail fleet of approximately 380 stores concentrated in Southern California and provide CVS Caremark with a solid footprint in the country’s largest drugstore market. In addition, Longs provides pharmacy benefit management (PBM) services with annual revenue of close to $380 million that can be integrated into the CVS Caremark Pharmacy Services segment.
Post the acquisition, Fitch expects CVS Caremark to reduce its commercial paper balances and pay down its bridge facility over the next 12-18 months through strong free cash flow generation at both its retail and pharmacy services businesses. As a result, credit metrics are expected to improve from 2.6 times (x) adjusted debt/ EBITDAR and 3.8x EBITDAR/interest + rents for the latest 12 months ending June 28, 2008.
The ratings continue to reflect the company’s scale and strong brand recognition, leading market shares and operating metrics, its successful track record of integrating acquisitions, as well as the recession-resistant nature of drugstore retailing. Of concern are the risks of integrating the Longs acquisition, lower industry script trends due to the lack of new drugs and higher co-pays, and potential cuts in prescription reimbursement rates. In addition, significant share buyback activity could preclude CVS Caremark from deleveraging its balance sheet. However, Fitch expects CVS Caremark to refrain from additional share repurchases over the next 12 months as it absorbs the Longs acquisition.
The ratings on the Enhanced Capital Advantaged Preferred Securities (ECAPS) reflect their junior subordinated position in the capital structure, their cumulative optional deferral feature, their long effective maturity, and lack of restrictive covenants. As a result, Fitch has assigned a 75% equity credit to these securities, as is outlined in Fitch’s updated criteria report ‘Equity Credit for Hybrids & Other Capital Securities’ dated June 25, 2008 and available on the Fitch Ratings web site at www.fitchratings.com.
Fitch’s rating definitions and the terms of use of such ratings are available on the agency’s public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the ‘Code of Conduct’ section of this site.
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