CVS Boosts Its Bid Again for Merger With Caremark
By Paul Grimaldi, The Providence Journal, R.I.
Feb. 14–CVS Corp. yesterday raised its offer for Caremark Rx Inc., hoping to sway investors and financial advisers who have lined up against the Woonsocket company’s proposed acquisition of the nation’s second-largest pharmacy benefits manager.
Drugstore-chain operator CVS increased its cash dividend offer for Tennessee-based Caremark to $6 per share –tacking on $4 per share to its previous dividend offer. The increased dividend would add about $1.7 billion in value to the CVS deal, bringing it to about $24 billion.
Rival Express Scripts Inc. has a cash-and-stock offer on the table valued at $26.6 billion, or $61.08 per share.
CVS raised its bid for the second time as it tried to persuade investors to approve the merger that was scheduled for a shareholders’ vote Tuesday in Nashville, Tenn., Caremark’s home city.
Yesterday, however, a Delaware judge blocked Caremark shareholders from voting until March 9. Ruling on a request from a Louisiana pension fund, Delaware Chancery Court Judge William Chandler barred Caremark from holding the planned vote to give investors time to consider CVS’s increased offer.
CVS yesterday continued to lobby Caremark shareholders, arguing that CVS has the best offer.
“Clearly, the CVS/Caremark merger is superior to the illusory and highly conditional Express Scripts’ ‘offer’ in every conceivable way,” said Tom Ryan, chairman, president and chief executive officer of CVS, in a statement. “Our merger can be closed quickly, delivers real and concrete shareholder value and is based on a compelling strategic rationale.”
Since the deal was first announced in November, four investment advisory firms have recommended that Caremark shareholders reject the CVS offer. The latest recommendation came Monday from influential Institutional Shareholder Services. The ISS recommendation may be significant because some mutual funds are required under their bylaws to follow ISS recommendations.
“We conclude that the process was flawed to such a degree that we cannot recommend that Caremark shareholders support the transaction as currently constructed,” ISS said in a report.
Before Caremark shareholders actually vote, the financial calculus they consider is likely to change again, said people following the deal.
In a research note to investors on Monday, analysts at Wachovia Capital Markets said they expected investors to prefer Express Scripts because it offered $5 more per share for Caremark’ stock than CVS did — a price “simply too large for [Caremark] investors to ignore.”
“We think the current [Express Scripts] offer is compelling enough to derail the CVS offer without an increase in the acquisition price.”
Yesterday’s announcement by CVS was enough to change the handicapping at Wachovia.
“We believe that [Caremark] shareholders would be likely to support the CVS merger,” wrote the Wachovia analysts.
Andrew L. Speller, a research analyst at A.G. Edwards & Sons Inc., said CVS is “certainly in a better position than they were [Monday].”
Express Scripts must raise its bid to solidify a “no” vote on the CVS bid, Speller said.
“For CVS not to win the Caremark shareholder vote I think the premium difference needs to be in the 5- to 8-percent range,” he said.
As of yesterday, the difference between the two bids was about 2 percent, Speller said.
Express Scripts did not raise its bid yesterday, preferring to swipe at CVS.
“Today’s announcement can’t paper over a flawed process, weaker currency and unproven strategic rationale,” Express Scripts said in a written statement. “Caremark stockholders are still being offered a low-growth CVS currency and ownership in a CVS/Caremark combination that is predicated on a model that history shows will destroy value.”
Rich Clayton, a research analyst at CtW Investment Group, said his company wouldn’t change its stance on the way Caremark has gone about the merger process. CtW is affiliated with union pension funds holding 1.5 million Caremark shares.
CtW doesn’t favor one bid over another, Clayton said. Instead, the group wants to throw open the bidding. “We believe Caremark shareholders will be best served if — following rejection of the CVS-Caremark proposal — the Caremark board quickly initiates an auction process to solicit proposals from all interested suitors.”
The new CVS offer underscores his view that Caremark is “leaving a lot of money on the table,” Clayton said.
Caremark shares yesterday rose $1.97 to close at $62.88. CVS shares fell 40 cents, to close at $32.09. Express Scripts moved up 68 cents, to $75.41.
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