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In a deal that appears likely to prompt significant regulatory scrutiny, Express Scripts (NASDAQ:ESRX) has agreed to pay $29.1 billion to buy Medco Health Solutions (NYSE:MHS), one of its biggest rivals in the behind-the-scenes world of pharmacy benefits management. The merger comes amid a huge overhaul of the U.S. healthcare landscape in which more Americans will be covered by health insurance.

However, the move comes just as Medco, which is the largest PBM, lost an important $11 billion contract with UnitedHealth Group that accounted for 17 percent of its business. Medco has also lost other big contracts recently, including one with the Federal Employees Health Benefits Program to CVS Caremark and another with the California Public Employees Retirement System, or Calpers amid a scandal that prompted the Securities and Exchange Commission to issue a subpoena (see here).

For those interested in dollars and cents, Medco shareholders will receive $71.36 per share in cash and stock or, put another way, $28.80 in cash and 0.81 shares for each Medco share they own. After the deal is done, Express Scripts shareholders will own about 59 percent of the combined company. Of course, passing muster with regulators may not be easy, given these are two of three largest PBMs.

For that reason, Express Scripts CEO George Paz wrapped himself - and the deal - in the flag in a statement touting the virtues of the acquisition. “Companies like ours have a responsibility to provide the leadership and resources required to drive out waste in healthcare and provide the best care in the world. The merger with Medco will accelerate our efforts to create greater efficiencies in the healthcare system and better protect American families from the rising costs of prescription medicine while improving health outcomes.”

Whether Express Scripts can win over the Federal Trade Commission - and at what price - remains to be seen. The PBM executive team is, of course, expressing optimism in discussions with key investors and Wall Street analysts today, but will have a harder selling job in Washington, where consumer and employer groups can be expected to register their own views.

“This is a big surprise. I did not expect to see these two companies come together, strictly because of FTC issues,” Jeffries & Co. analyst Art Henderson tells us. “Express Scripts management told us they consulted with counsel and will get through the process. I imagine this will be the single biggest concern of investors and industry participants, though.”

Nonetheless, the deal makes sense, he adds, because both PBMs were set to face what he calls “pretty significant headwinds,” given the large number of brand-name prescription drugs that are losing patent protection. Now, though, they will be better positioned to negotiate rebates. “These companies are much better situated together than apart. From a Wall Street perspective, people should love it. From a competitor’s standpoint, this will be a formidable entity.”

Indeed, in talking up the deal, Paz points to greater savings for plan sponsors and more efficiencies in its own supply chain, which includes mail order. And he pointed to Medco initiatives to evaluate medicines based on comparative effectiveness; one such deal was recently struck with Sanofi (NYSE:SNY) (read here).

As for cost savings, Paz estimates the deal can cut about $1 billion in expenses, or roughly 1 percent of the expenses of the combined companies. What this will mean for jobs is unclear, at the moment. As of the end of 2010, Medco employed 23,425 people, and about 27 percent belong to unions. Express Scripts employed 13,170 people, but only 6 percent are represented by unions.

Disclosure: None