Conservative · Stocks to Consider and Updates

CVS to Buy Target’s Pharmacy Business

 CVS  Woonsocket, Rhode Island-based CVS Health Corp. (NYSE: CVS – $102.57) and giant discount retailer Target Corp. said they have entered into a definitive agreement for CVS to acquire Target’s pharmacy and clinic businesses for about $1.9 billion. Through this agreement, 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. The acquisition allows CVS to expand into new markets such as Seattle and Denver and will generate annual revenue of $4.2 billion on top of CVS’ $48 billion from its present retail pharmacy business.  In addition, CVS Health and Target plan to develop 5 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.  CVS Health expects this transaction to generate substantial sales and prescription volumes upon closing and to generate significant operating profit over the long-term. The company will finance the deal with additional debt, which is already a bit stretched from its planned $10.4 billion acquisition of Omnincare. Therefore, CVS will reduce its stock buyback program for 2015 by $1 billion, from $6 billion to $5 billion to help defray the new financing. This reduction in share repurchases will reduce the company’s 2015 adjusted earnings per share guidance by approximately one cent per share and will lower 2016 EPS by about 4 cents. With the stock near its record high, investing in a growth opportunity seems like a better use of capital than share repurchases and CVS remains a core holding in a well-diversified conservative portfolio.


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