CVS Health and Target have entered into a definitive agreement for CVS Health to acquire Target’s pharmacy and clinic businesses for approximately $1.9 billion.
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Through this agreement, CVS Health will acquire Target’s more than 1,660 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. 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.
In addition, CVS Health and Target 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.
This strategic relationship brings together two leading retailers with complementary strengths, brands and cultures to enhance the health care experience for Target guests while expanding CVS Health’s retail presence in new markets, such as Seattle, Denver, Portland and Salt Lake City.
The transaction enables CVS Health to reach more patients, adding a new retail channel for its offerings, and expanding convenient options for consumers. The relationship is expected to benefit Target’s long-term traffic and sales growth. It also enables Target to strengthen its focus on wellness as a signature category.
Following completion of the transaction, Target guests will have access to CVS Health’s leading pharmacy care programs and medical clinic services. Pharmacy programs, including Pharmacy Advisor, Specialty Connect and Maintenance Choice, will help consumers achieve better medication adherence through both improved convenience as well as enhanced pharmacy care counseling.
CVS Health has also committed to having a low-cost generic drug option available to Target’s cash-paying guests. In addition, with MinuteClinic at Target locations, Target guests will have enhanced access to high-quality affordable medical care. CVS Health customers will gain the option of an expanded, one-stop Target shopping experience, including apparel, home, fresh food and more, when seeking health care services.
Together, Target and CVS Health will evaluate and select locations best-suited for new small format Target stores with a CVS/pharmacy inside. Additionally, Target and CVS Health will explore new market offerings that have the potential to generate strong returns on investment and offer long-term benefits for customers and communities.
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 timing of closing the transaction is uncertain; 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.
This includes the dilutive impact to 2016 from the lower 2015 share repurchase of approximately 4 cents per share as well as financing costs of approximately 5 cents per share; it excludes integration costs and any transaction or one-time costs associated with the deal.
On the same basis, the transaction is expected to be approximately 10 cents accretive to CVS Health’s Adjusted Earnings Per Share in 2017, and at least 12 cents accretive to CVS Health’s Adjusted Earnings Per Share in 2018 and beyond.
This transaction will allow Target to continue offering this traffic-driving business in its stores and deliver a differentiated experience in support of its wellness efforts.
Target’s after-tax net proceeds from the transaction are expected to be approximately $1.2 billion, which Target expects to deploy in support of its long-standing capital priorities, including share repurchase.
The transaction is expected to benefit Target’s Segment EBITDA and EBIT margins post-close, is expected to be accretive to Target’s EPS immediately following the deal close, and is expected to add half a percentage point or more to Target’s return on invested capital over time.
The transaction is subject to customary closing conditions, including necessary regulatory clearance. In-store changes will be rolled out over a period of several months. ■