Caremark Vote Delayed After CVS Sweetens Takeover Bid

A Delaware judge ordered Caremark Rx to delay a shareholder vote on a proposed acquisition by CVS just hours after the drugstore operator tripled the special cash dividend it proposes to pay as part of the deal.

Caremark shareholders were initially scheduled to meet Feb. 20, but the vote was delayed until March 9 in an order signed by Chancellor William B. Chandler III.

CVS, of Woonsocket, R.I., is competing with a hostile offer from pharmacy benefits manager Express Scripts to buy Caremark, though the Caremark board favors the CVS bid.

Chandler is hearing a shareholder lawsuit challenging the Caremark-CVS deal filed by Louisiana Municipal Police Employees' Retirement System. Lawyers for the pension fund asked the judge to postpone the shareholder vote because it needs more time to consider the latest offer from CVS.

CVS said it would raise the dividend payment to Caremark shareholders from $2 per share to $6 after several shareholders and proxy advisers called the CVS offer too low. Analysts said the move likely is aimed at trying to win over Caremark shareholders before they vote next Tuesday.

Judge's Statement

Chandler stated in his order that the "court is not confident that all Caremark shareholders would be able to make an informed decision if they are required to vote on Feb. 20."

The increased dividend will add about $1.7 billion in value to the CVS deal, previously estimated at $24 billion. That brings it roughly into line with the Express Scripts bid worth about $26 billion.

Caremark officials weren't immediately available for comment after the judge's ruling.

Caremark shares rose $2.19, or 3.5 percent, to $63.19 on the New York Stock Exchange where CVS shares fell 39 cents, or 1.1 percent, to $32.10. Express Scripts stock rose 96 cents to $75.69 on the Nasdaq Stock Market.

The other conditions of the CVS bid for Nashville-based Caremark remain unchanged, and the companies reiterated the benefits of the proposed deal, including annual cost savings and cash flow projections.

The CVS offer has already won antitrust approval. But the offer from Express Scripts of Maryland Heights, Mo., has yet to receive antitrust clearance. Express Scripts is the third-largest pharmacy benefits manager and Caremark is No. 2.

"Clearly, the CVS/Caremark merger is superior to the illusory and highly conditional Express Scripts' 'offer' in every conceivable way," said Tom Ryan, chairman, president and CEO of CVS. "Our merger can be closed quickly, delivers real and concrete shareholder value and is based on a compelling strategic rationale."

Investment advisory firms Glass, Lewis, CtW Investment Group and Institutional Shareholder Services have said that Caremark's board has not succeeded in getting the best deal for its shareholders and urged before the latest dividend increase that Caremark shareholders reject the CVS bid.

"It's Come a Long Way"

Andrew Speller, an analyst with A.G. Edwards & Sons, said CVS is raising its bid to try to persuade the groups to recommend its proposed deal with Caremark. He also expects Express Scripts to raise its bid soon.

"When this thing was first announced, shareholders were only getting around $50 per share. It's come a long way," Speller said. "Right now it seems to be all about the price and the price relative to the risk."

CtW spokesman Michael Garland said on Tuesday the group's position on the Caremark deal for CVS has not changed, despite CVS increasing the cash dividend.

"This increased offer is a desperate move to salvage the deal," Garland said. "Frankly what happened today reinforces shareholder concerns here. It was a terribly flawed process the Caremark board went through that failed to maximize value for Caremark shareholders.

"Caremark would be a ripe product for a private equity firm," he said. "There may be other bidders out there as well."

Institutional Shareholder Services is continuing to recommend a vote against the Caremark and CVS merger, spokeswoman Sarah Cohn said.

Representatives with Glass, Lewis in San Francisco could not be immediately reached for comment.

Express Scripts said in news release that Caremark shareholders should vote against the proposed merger of CVS and Caremark to "send a message to the (Caremark) board that it is time to level the playing field."

"It is time for the Board to allow a full and fair process to determine what is in the best interests of Caremark stockholders," the company said.