U.S. News

CVS Boosts Special Dividend in Caremark Merger Proposal


CVS sweetened its $23.9 billion takeover bid for Caremark on Thursday with an increased
dividend, calling its newest proposal its "best and final" offer for the pharmacy-benefits manager.

CVS , seeking to thwart rival suitor Express Scripts , offered to pay $54.12 a share, plus a higher, one-time dividend of $7.50 per share after closing of the deal. The dividend previously was $6 per share.

The increased dividend marked the third time CVS has improved its bid since November, when it agreed to buy Caremark in an effort to expand its prescription benefits and mail-order business.

The higher offer still was below Caremark's closing stock price of $62.16, up 86 cents, or 1.4%, on the New York Stock Exchange.

Express Scripts has bid $61.63 a share, or $26.9 billion, for Caremark. It also has offered to pay interest on the cash portion of its offer to compensate Caremark shareholders for a lengthier antitrust review. "CVS has gotten the offer close enough to Express Scripts' bid to sway shareholders," said Mitchell Corwin, an equity analyst with Morningstar.

CVS, the No. 2 U.S. drugstore chain, said its shareholders would vote on the deal on March 15. Caremark's shareholders are scheduled to vote on March 16.

Express Raises Caremark Offer

Although Express Scripts has offered more money, a deal with Caremark would not close until the third quarter of 2007. Its offer for Caremark still faces regulatory review and shareholder approval.

CVS also said the merged CVS-Caremark would launch a cash tender offer for 150 million shares, or about 10% of its outstanding stock, at $35 a share. The changes CVS made to its bid "make an already compelling transaction even more attractive for Caremark shareholders," Caremark said.

"The near-term cash value has been increased by $3.2 billion since the merger was originally announced, while the $5.25 billion post-closing tender offer will increase the earnings accretion of this powerful combination," Caremark said.

Caremark reaffirmed its support for the CVS transaction and rebuffed the revised offer made by Express Scripts on Wednesday.

Express Scripts' hostile bid still failed to "address the deficiencies in the original Express Scripts proposal, particularly its highly conditional and highly leveraged nature, nor does it address the significant risks of business disruption and customer attrition," Caremark said.

Express Scripts could not be immediately reached for comment.

CVS said the merger would solidly add to earnings and cash flow in 2008 and the combined company was expected to retain a "solid investment grade rating."

"There's definitely some comfort to be found in them saying this is the 'best and final' offer and the bidding war is likely to come to a close," Corwin said.

"The bids and counter-bids are further evidence that the Caremark board has not actively negotiated with all parties, leaving shareholders unable to know whether they are receiving full value for their shares," said CtW Investment Group, which advises pension funds that own about 1.5 million shares of Caremark.

"Each increase (of CVS's bid) appears to have resulted not from negotiations by a conflicted Caremark Board, but rather from CVS's concern with the competing, unsolicited offers from Express Scripts," said CtW, which reiterated its opposition to the CVS deal.