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CVS buying Caremark for about $21.3B in stock

Updated:
NASHVILLE, Tenn. (AP) _ Drugstore operator CVS Corp. announced Wednesday it is buying pharmacy benefits manager Caremark Rx Inc. for about $21.3 billion in stock.

The deal, which the companies described as a ``merger of equals,'' would create a $75 billion drug distribution powerhouse that can take on retail leader Wal-Mart's growing presence in generic drug sales, analysts said.

Company officials said the deal would create significant benefits for employers and health plans through more effective cost management and new programs, and for consumers through expanded choice and more personalized services.

``Combining Caremark's expertise in serving employers and health plans with CVS's expertise in serving consumers will create a powerful force for change in pharmacy services,'' said Edwin ``Mac'' Crawford, Chairman, CEO and President of Caremark, which is based in Nashville.

Under terms of the deal, Caremark shareholders will receive 1.67 shares of Woonsocket, R.I.-based CVS for each share of Caremark. CVS shareholders will own 54.5 percent of the combined company and Caremark shareholders will own 45.5 percent. The board of directors will be split evenly.

The new company will be called CVS/Caremark Corp. and will be headquartered in Woonsocket.

The pharmacy services business will remain based in Nashville. Combined 2006 revenue for the companies are expected total about $75 billion, a joint statement said.

Caremark's Crawford will become the chairman of the combined company and Tom Ryan, his counterpart at CVS, will become president and chief executive.

The companies announced they were in talks about a combination before the New York Stock Exchange opened Wednesday.

In late trading on the NYSE, CVS shares tumbled $2.54, or 8.1 percent, to $28.84 while Caremark lost $1.46, or 3 percent, to $47.77 on the news.

Glenn Garmont, an analyst with First Albany Corp., said before the announcement that the deal was likely spurred in part by the fear that Wal-Mart Stores Inc., the world's biggest retailer, ``will emerge as a fierce new competitor following its introduction of selected $4 generic drugs.''

Wal-Mart announced last week that it is extending its generic prescription drug plan charging $4 for a one-month supply of 314 different prescriptions. The expansion will make the prices available at 1,008 stores in 27 states.

Garmont said such a deal between Caremark and CVS ``would spawn others, and we view all PBMs ... as potential take-out targets.''

Caremark buys drugs from pharmaceutical companies directly and then distributes them through its national network of about 60,000 pharmacies and seven mail-order offices. The company also offers administrative, benefits planning, and claims processing services and manages drug therapy, physician support, and education services.

Since merging with rival AdvancePCS, Caremark provides services for over 2,000 corporate, insurance, managed care, government, and union health plans.

Caremark has more than 13,000 employees, and posted 2005 net income of $932.4 million on sales of $32.99 billion.

CVS is the nation's largest pharmacy chain by prescriptions filled, and is just behind rival Walgreen Co. in total sales. It operates more than 6,200 stores in 45 states, offers managed-care drug programs through its PharmaCare unit and employs about 148,000 workers. CVS reported 2005 net income of $1.22 billion on sales of $37.01 billion.

The Securities and Exchange Commission has been investigating whether executive stock options were backdated at Caremark, company officials have acknowledged. In September, Caremark's Crawford said the company is in ``good shape'' regarding the investigation and doesn't expect to have to restate earnings.

Backdating can increase the value of options that give the recipient a chance to buy shares at a specified price and profit on any subsequent rise in price. The options exercise price is usually set on the date of the award, but the SEC is looking at whether the price were set at some earlier date to make the options more valuable to the recipient without appropriate disclosure.
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