Caremark Favors CVS Offer Over Express Scripts, Shares Say Traders Expect More

Caremark Rx Inc., the second-largest manager of pharmacy benefits in the U.S., said Sunday it rejected a $26 billion unsolicited merger bid from Express Scripts Inc., sticking with a lower offer from the drugstore chain CVS Corporation. It's Press Release said its Board of Directors determined "that the Express Scripts proposal does not constitute, and is not reasonably likely to lead to, a superior proposal... [and] is not in the best financial or strategic interests of Caremark and its shareholders." The proposal, it said, lacks strategic rationale, risks customer attrition, is intentionally derailing the CVS/Caremark merger, faces significant antitrust risks, and would result in a highly leveraged and weakened business. It said it remains convinced "that its pending combination with CVS will define and lead the next evolution of the pharmaceutical services industry," allowing it to create differentiated services for customers that give them great choice. In a subsequent Press Release, CVS expressed pleasure with Caremark's rejection, saying it hoped to close the transaction in the first quarter, 2007. Express Scripts said it believes "Caremark is attempting to use antitrust as a red herring to distract stockholders from the real value differential at issue." CVS's offer is for $48.53/share, while Express Scripts Dec. 18 offer is for $58.50. Caremark shares closed Friday at $56.35, suggesting investors expect a higher price.

• Sources: Caremark Press Release, CVS Press Release, New York Times, Bloomberg
• Related commentary: Express Scripts Undercuts CVS in Brazen Bid For Rival Caremark Rx, CVS to Acquire Caremark Rx for $21 Billion, How the CVS-Caremark Merger Might Work (Or Not), Is CVS the Prescription Fix for Caremark?, CVS-Caremark Deal Would Create Pharmacy Powerhouse
• Potentially impacted stocks and ETFs: Caremark Rx Inc. (CMX), CVS Corp. (CVS), Express Scripts Inc. (ESRX). Competitors: Wal-Mart Stores Inc. (WMT), Medco Health Solutions (MHS), Wellpoint, Inc. (WLP). ETFs: Retail HOLDRs (RTH), SPDR Retail (XRT), PowerShares Dynamic Pharmaceuticals (PJP), iShares Dow Jones US Pharmaceuticals (IHE), SPDR Pharmaceuticals ETF (XPH)

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