Why CVS Is Getting Target Pharmacies on the Cheap

Both companies announced a definitive agreement in which CVS will acquire Target’s pharmacy and clinic businesses for roughly $1.9 billion. Specifically, CVS will acquire Target’s 1,660 pharmacies across 47 states and operate them through a store-within-a-store format, branded as CVS/pharmacy.

Barclays served as a financial advisor for CVS while Goldman Sachs was the financial advisor for Target.

Going forward, CVS will operate pharmacies within all new Target stores that offer pharmacy services. Target’s nearly 80 clinic locations will be rebranded as MinuteClinic, and CVS will open up to 20 additional 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.

If this transaction was only valued at the pharmacy level, CVS would be paying about $1.14 million per pharmacy, which is relatively cheap. Target looks to benefit from this too, as this is a significant cut to its overhead.

CVS expects this transaction to generate significant sales and prescription volumes on closing, and over the long term to generate a significant operating profit. This transaction will be financed through additional debt. According to the company:

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.

Both companies noted that the current timing of the transaction is uncertain, but it is expected to close within the year.

Shares of Target closed Friday down 0.8% at $79.47, in a 52-week trading range of $57.06 to $83.98. In premarket trading Monday, shares were up about 0.3% at $79.70. The stock has a consensus analyst price target of $81.32.

CVS shares closed Friday down 0.4% at $102.22. In premarket trading Monday, shares were up 0.7% at $102.92. The consensus price target is $115.40 and the 52-week range is $74.64 to $105.46.