Caremark Stock Up on Speculation of Bidding War

Caremark Rx shares rose sharply after drugstore chain CVSsweetened its bid for the pharmacy benefit manager and analysts projected ExpressScripts could counter with a higher offer.

In a move to solidify its $23.5 billion all-stock offer, CVS late Tuesday said it would give Caremark shareholders a one-time cash dividend of $2 a share after the deal closes
and retire about 10 percent of the combined company's outstanding shares.

The special dividend raised the CVS offer to within 4% of Express Scripts' hostile $25.2 billion bid, analysts said, leading to speculation that Express, a Caremark rival, would soon come back with another offer.

"We would not be surprised to see Express Scripts improve its offer to stay in the game," Bear Stearns analyst Robert Summers said in a research note.

Summers projected that Express Scripts could boost its offer as high as $63 a share and still have the deal remain positive to earnings, excluding costs of the integration.

Express's offer--which involves cash and stock--values Caremark shares at $57.24, based on Tuesday's closing prices.

Caremark shares rose despite a downgrade of the stock to "neutral weight" from "overweight" by Prudential Equity Group analyst David Shove.

In a research note, Shove said, "We do not believe this offer benefits Caremark shareholders to the same degree that a simple increase in shares or cash from CVS would have."

However, Goldman Sachs analyst John Heinbockel said CVS "may have delivered the knockout punch" with its latest offer.

"Although Express Scripts could always raise its bid to reestablish a wider spread, its shares might react negatively, thus negating the higher offer," Heinbockel said in a research