Shareholder vote paves way for new health giant

Associated Press • Mar 17, 2007 at 1:27 AM

NASHVILLE - After months of skirmishes in the courts that played out in headlines, Caremark shareholders on Friday made CVS the victor in a buyout tussle with rival Express Scripts.

The result: One of the largest competitors in the prescription drug industry with formidable power to negotiate with drug companies in pricing.

Shareholders of Caremark Rx Inc. approved a $26.5 billion acquisition by CVS Corp. on Friday.

The combined forces of the second-largest U.S. pharmacy benefits manager and the nation's largest retail pharmacy chain will go head to head with Walgreen's, Wal-Mart Stores Inc., and also Medco Health Solutions Inc., the largest benefits manager.

But the deal approved Friday didn't come easy. Express Scripts Inc. and CVS have been in public relations scrap for months as both sought to sway Caremark shareholders.

Increased antitrust scrutiny of the Express Scripts' proposal and the decision earlier this week not to increase its offer for Caremark turned the battle in CVS' favor, some analysts said.

Caremark announced after a 15-minute shareholder meeting in Nashville Friday that more than 50 percent of the shares voted were cast in favor of the deal.

Company officials said they will not have an exact breakdown on the votes until the tally is certified sometime next week. But they said a "substantial majority" of outstanding shares voted for the deal.

There were no stockholder comments at the meeting, held in the city where the company is based.

About 200 people attended, including several analysts, as well as officials from Caremark and Express Scripts.

The deal will create a $75 billion drug distribution powerhouse.

Analysts say that the announcement of the CVS bid in November was likely spurred in part by the fear that Wal-Mart, the world's biggest retailer, would emerge as a fierce new competitor after it dropped prices on some generic drugs to $4.

Andrew Speller, an analyst with A.G. Edwards & Sons Inc., said it might take a year to 36 months to see the competitive changes within the prescription drug industry because of the CVS takeover.

"Certainly the bargaining power is going to be there," he said. "From a consumer standpoint, there will be more choices structured within your pharmacy benefits. Right now, you're told what drugs are covered, what the price is and where to go, in terms of your retail pharmacy network.

"Some of that is going to be more flexible, like you don't have always have to receive some drugs by mail, you can go to CVS to get your 90-day prescription. You might also be able to get more discounts if you're a Caremark or CVS customer."

The combined company will be called CVS/Caremark Corp. and will be based in Woonsocket, R.I., where CVS is headquartered.

"The shareholders spoke. We're gratified they realized the value of this combination as we go forward," said Mac Crawford, chairman, chief executive and president of Caremark. "I think we have got a very good outcome for our shareholders."

Caremark officials say they expect to close on the deal by next week.

CVS shareholders had approved the stock and cash buyout Thursday. Maryland Heights, Mo.-based Express Scripts' bid was slightly higher, valued at about $27.2 billion, but had not been approved by the Federal Trade Commission.

The CVS bid already passed its FTC review.

Caremark executives favored the CVS deal all along, and cited concerns that the FTC might reject the Express Scripts' offer.

Andy Klevorn, an antitrust lawyer for Chicago-based law firm Eimer Stahl Klevorn & Solberg, said increased antitrust scrutiny of the Express Scripts proposal likely weighed heavily on the minds of Caremark shareholders. "It involves substantial introduction of documents that would likely take them months to complete," Klevorn said. Tom Ryan, chairman, president and chief executive officer of CVS, said in a statement that Friday's vote "will transform the way pharmacy services are delivered, enabling consumers to benefit from enhanced healthcare services." Caremark buys drugs from pharmaceutical companies directly and then distributes them through its national network of about 60,000 pharmacies and seven mail-order offices. Caremark earnings for the fourth quarter rose 4 percent and profit totaled $301.5 million, or 71 cents per share, from $290.7 million, or 64 cents per share from the same year-ago period. Revenue rose 11 percent to $9.27 billion from $8.4 billion. CVS is the nation's largest retail pharmacy chain, based on the number of locations - more than 6,200 stores in 43 states. CVS fourth-quarter profit rose nearly 3 percent, while net income grew to $413.6 million, or 49 cents per share, from $402.8 million, or 48 cents per share, in the year-ago period. Revenue rose 24 percent to a record $12.07 billion from $9.73 billion last year. Express Scripts issued a statement after the vote from president, chief executive and chairman George Paz, thanking stockholders of both Caremark and Express Scripts for considering the company's proposal. The Caremark shareholder vote was delayed twice because of a pension fund shareholder's lawsuit that claimed Caremark executives struck a bargain that favored company insiders over regular shareholders. Although the petition failed to stop the CVS deal, it revealed documents showing that Crawford negotiated jobs for himself, his son and other executives, won protection for the Caremark board from an ongoing investigation into backdating of stock options and guaranteed at least some Caremark directors would serve on the new company's board. The bidding began in November, when CVS offered $21.2 billion in stock for Caremark. Express Scripts issued a hostile bid of $26 billion in cash and stock a month later. CVS boosted its offer for Caremark three times, while Express Scripts sweetened its offer once. CVS added a special cash dividend that climbed to $7.50 a share, payable to Caremark shareholders when the deal closes. Investment advisory firms Glass, Lewis & Co. and CtW Investment Group recommended that Caremark shareholders oppose the CVS bid. They contended Caremark's board didn't negotiate the best deal for its shareholders. "We're going to continue to encourage shareholders to hold Caremark officials accountable when they join CVS," Brishen Rogers, an attorney for CtW Investment Group, said after the vote. "The merger is accomplished at this point, but we need to protect value of those companies." CVS said its offer for 150 million of CVS/Caremark's outstanding shares will begin about five business days after the closing. Caremark shares fell 37 cents to $62.38 while CVS stock fell 40 cents to $32.94 on the New York Stock Exchange in afternoon trading. Express Scripts shares rose 7 cents to $82.48 on the Nasdaq Stock Market. (AP) On the Net: Caremark Rx Inc.: http://www.caremark.com CVS Corp.: http//www.cvs.com Express Scripts Inc.: http://www.express-scripts.com AP-CS-03-16-07 1738EDT

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