CVS to Acquire Target Pharmacies, Clinics for $1.9B

WOONSOCKET, RI—CVS Health Corp. has signed an agreement to acquire Target's pharmacy and clinic businesses across the United States in a deal valued at approximately $1.9 billion.

According to the joint announcement released this morning, CVS Health will acquire Target's more than 1,660 in-store 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, the companies state.

In addition, 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. CVS Health and Target also 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 deal will expand CVS Health's retail presence in new markets, such as Seattle, Denver, Portland and Salt Lake City. The transaction also could open up additional development opportunities, the companies report. Target and CVS Health state they 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.”

“This strategic relationship with Target supports the highly complementary customer base, brand and culture we share,” says 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 health care focus and an appreciation of the rise of health care consumerism with consumer choice and accountability growing. This relationship with Target will provide consumers with expanded options and access to our unique health care services that lead to better health outcomes and lower overall health care costs.”

“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,” says Brian Cornell, Target chairman and CEO. “By partnering with CVS Health, we will offer our guests industry leading health care services, and at the same time, sharpen our focus on elevating the way we deliver wellness products and experiences to our guests.”

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 companies are uncertain about when the transaction will close. CVS Health states that 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.

Barclays served as the financial advisor to CVS Health. CVS Health was advised on transaction legal matters by Fried Frank and on regulatory matters by Dechert LLP. Goldman Sachs acted as financial advisor to Target. Faegre Baker Daniels LLP, Wachtell, Lipton, Rosen & Katz and Dorsey & Whitney advised Target on legal matters.