Last updated on June 16th, 2015 at 03:49 pm
It was announced this week that CVS Health Corp. and Target Corp. have entered into a definitive agreement for CVS Health to acquire Target’s pharmacy and clinic businesses for approximately $1.9 billion. It’s big news, and a deal that—as Reuters reports—may spur supermarkets to find their own pharmacy partners.
Reuters reports: “Drug stores in recent years have focused on opening new stores, an effort which has slowed recently.
“Target pharmacies helped drive overall sales at the chain but lost money, as the government health care program known as Obamacare expanded ranks of insured and increased pressure on costs.
“‘Grocery store chains must be taking the news today and thinking hard about it. Pharmacy is not really a core competence,’ said Todd Huseby, partner, AT Kearney, said, citing Safeway and Albertsons as two companies that might consider it. Neither responded to a request for comment.
“Some supermarkets may have the scale and buying power to make their own pharmacies work, said Neil Stern, senior partner at retail consulting firm McMillan Doolittle. They may see the store-in-store format as an opening for a competitor, he said.
“However, margins are eroding, said Adam Fein, president of advisory and research firm Pembroke Consulting.
“‘The future of pharmacy is really about being a low cost buyer of generic drugs and capability to dispense specialty drugs and that is an area of challenge for several supermarket operators,'” he said.
Through the CVS-Target deal, CVS Health will acquire Target’s more than 1,660 pharmacies across 47 states and operate them through a store-within-a-store format, branded as CVS/pharmacy. In addition, a CVS/pharmacy will be included in all new Target stores that offer pharmacy services. Target’s nearly 80 clinic locations will be rebranded as MinuteClinic, and CVS Health will open up to 20 new clinics in Target stores within three years of the close of the transaction. The new clinics will be part of CVS/minuteclinic’s plan to operate 1,500 clinics by 2017. In addition, CVS Health and Target plan to develop five to 10 small, flexible format stores over a two-year period following the deal close, which will each be branded as TargetExpress and include a CVS/pharmacy.
The companies say this strategic relationship brings together two leading retailers with complementary strengths, brands and cultures to enhance the healthcare experience for Target guests while expanding CVS Health’s retail presence in new markets, such as Seattle, Denver, Portland and Salt Lake City. The transaction enables CVS Health to reach more patients, adding a new retail channel for its offerings and expanding convenient options for consumers. Given CVS Health’s proven success in growing its business, the relationship is expected to benefit Target’s long-term traffic and sales growth, according to the companies. It also enables Minnesota-based Target to strengthen its focus on wellness as a signature category. Moving forward, enhanced efforts by Target will center on continuing to deliver products and experiences to help guests eat well, be active and find natural and clean label products.
“This strategic relationship with Target supports the highly complementary customer base, brand and culture we share,” said Larry Merlo, CVS Health president and CEO. “When we introduced the new name for our company, CVS Health, we began a new era of growth with a broader healthcare focus and an appreciation of the rise of healthcare consumerism with consumer choice and accountability growing. This relationship with Target will provide consumers with expanded options and access to our unique healthcare services that lead to better health outcomes and lower overall healthcare costs.”
Added Target Chairman and CEO Brian Cornell, “At Target, we’ve talked a lot about the evolving preferences of our guests and this partnership demonstrates that we’re committed to putting them at the forefront of everything we do. By partnering with CVS Health, we will offer our guests industry leading healthcare services, and at the same time, sharpen our focus on elevating the way we deliver wellness products and experiences to our guests.”
Following completion of the transaction, Target guests will have access to CVS Health’s leading pharmacy care programs and medical clinic services. Pharmacy programs, including Pharmacy Advisor, Specialty Connect and Maintenance Choice, will help consumers achieve better medication adherence through both improved convenience as well as enhanced pharmacy care counseling. Rhode Island-based CVS Health says it also has committed to having a low-cost generic drug option available to Target’s cash-paying guests. In addition, with MinuteClinic at Target locations, Target guests will have enhanced access to high-quality affordable medical care. CVS Health customers will gain the option of an expanded, one-stop Target shopping experience, including apparel, home, fresh food and more, when seeking healthcare services.
The strategic relationship also unlocks future joint development opportunities, according to the companies. Together, Target and CVS Health will carefully evaluate and select locations best-suited for new small format Target stores with a CVS/pharmacy inside. Additionally, Target and CVS Health will explore innovative, new market offerings that have the potential to generate strong returns on investment and offer long-term benefits for customers and communities.
“We operate in a rapidly changing healthcare and regulatory environment,” said Merlo. “This requires companies like CVS Health to continually innovate, providing additional points of access, lowering costs and improving quality for both consumers and payors.”
This acquisition is consistent with each company’s stated goals of investing in core businesses that help drive growth.
CVS Health expects this transaction to generate significant sales and prescription volumes upon closing, and to generate significant operating profit over the long term. The company will finance the transaction with additional debt. In combination with CVS Health’s planned acquisition of Omnicare, this transaction will increase the company’s Adjusted Debt to EBITDA leverage ratio to approximately 3.2x. In support of reaching its leverage target of 2.7x, CVS Health is reducing its share repurchase guidance for 2015 by $1 billion, from $6 billion to $5 billion. This reduction in share repurchases reduces the company’s 2015 Adjusted Earnings Per Share guidance by approximately one cent per share and will lower 2016 Adjusted Earnings Per Share by approximately 4 cents per share.
The timing of closing the transaction is uncertain; assuming it closes near the end of the year, the transaction is expected to be approximately 6 cents dilutive to CVS Health’s Adjusted Earnings Per Share in 2016. This includes the dilutive impact to 2016 from the lower 2015 share repurchase of approximately 4 cents per share as well as financing costs of approximately 5 cents per share; it excludes integration costs and any transaction or one-time costs associated with the deal. On the same basis, the transaction is expected to be approximately 10 cents accretive to CVS Health’s Adjusted Earnings Per Share in 2017, and at least 12 cents accretive to CVS Health’s Adjusted Earnings Per Share in 2018 and beyond.
The companies say this transaction will allow Target to continue offering this traffic-driving business in its stores and deliver a differentiated experience in support of its wellness efforts. Target’s after-tax net proceeds from the transaction are expected to be approximately $1.2 billion, which Target expects to deploy in support of its long-standing capital priorities, including share repurchase. The transaction is expected to benefit Target’s Segment EBITDA and EBIT margins post-close, is expected to be accretive to Target’s EPS immediately following the deal close, and is expected to add half a percentage point or more to Target’s return on invested capital over time.
The transaction is subject to customary closing conditions, including necessary regulatory clearance. In-store changes will be rolled out over a period of several months thereafter, as CVS Health and Target work to ensure the smoothest possible transition for all pharmacy and clinic patients. CVS Health is committing to offering the approximately 14,000 in-store Target healthcare professionals comparable positions with CVS Health as part of the transition. Also following the deal closing, Target will further evaluate the business impact and related support needs at its headquarters locations.