By Lewis Krauskopf
NEW YORK (Reuters) - Express Scripts Inc will buy rival Medco Health Solutions Inc for $29.1 billion to create a U.S. powerhouse in managing prescription drug benefits, the companies said.
An experienced acquirer, Express Scripts would gain even more leverage for negotiating drug prices for its employer and other clients who have made it a priority to reduce their exposure to spiraling healthcare costs. Such expertise has made the industry's services all the more attractive.
The deal would give them greater clout against drugstore chains like Walgreen Co and increase competition with the likes of CVS Caremark Corp.
"This combined entity is a much better entity than the individual parts," Jefferies & Co analyst Arthur Henderson said. "This combination from a growth standpoint, really improves the outlook. Once integrated, the growth is going to slow to some extent, but that may be several years away."
Express Scripts will pay $71.36 per Medco share, a 28 percent premium to its closing price on Wednesday, the companies said on Thursday. Medco shareholders will receive $28.80 in cash and 0.81 share for each Medco share they own, according to the terms of the deal.
Medco shares rose 22 percent to $68.30 in premarket trading. Express Scripts shares rose 6.1 percent to $55.75.
Medco, the bigger company in terms of revenue, had lost two important contracts already this year. On Thursday, it said its account with UnitedHealth Group Inc, which represents 17 percent of revenue, would not be renewed. UnitedHealth is building up its own drug benefits business and stands to become a serious competitor.
"Given the attrition risk Medco faces over the next few years, in regard to the UnitedHealth contract going away in 2013, and other publicized losses, it's a good deal for Medco and their shareholders," JMP Securities Constantine Davides said.
ANTITRUST HURDLES
Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and also run extensive mail-order pharmacies.
The deal between two of the "Big 3" PBMs would create a clear industry leader and could encounter antitrust hurdles.
The combined company would be the industry's largest, with 1.6 billion annual prescription claims, while CVS Caremark would be second at 940 million, Davides said.
Henderson said the combined company would have about 30 percent of the market for prescription claims.
"There will be an antitrust hurdle to clear," Davides said. "It will take a while on the regulatory front, but it's a consolidating industry."
The industry is also expected to gain over the next few years as a wave of widely used medicines become available as generics, which are more profitable for the companies.
Upon completion of the transaction, Express Scripts shareholders are expected to own about 59 percent of the combined company and Medco shareholders are expected to own about 41 percent.
The combined company's corporate headquarters will be in St. Louis and Express Scripts chief George Paz will serve as chairman and CEO of the combined organization. The company's board of directors will be expanded to include two current independent Medco board members.
Express Scripts projected $1 billion in cost savings and other synergies -- about 1 percent of the combined company's costs -- and that the deal would slightly add to earnings in the first full year after closing. It is expected to close in the first half of 2012.
Henderson said the transaction could lead to far more in synergies than indicated by the companies.
For Express Scripts, the Medco deal comes after its purchase of the drug benefit unit of insurer WellPoint Inc for about $4.7 billion. It failed in its 2007 bid to wrest away Caremark from CVS.
The Express-Medco deal would be the year's second-largest takeover after AT&T Inc's planned purchase of T-Mobile USA.
Medco suffered a major setback in May when it lost a big pharmacy benefit contract to CVS. The surprising decision on that account followed closely on Medco losing a contract with Calpers, the biggest U.S. public pension fund.
Investors have also been worried about the fate of the UnitedHealth contract, which lapses at the end of 2012 and without which Medco loses significant scale.
The advisers for Express Scripts are Credit Suisse Group AG, Citigroup Inc and law firm Skadden, Arps, Slate, Meagher & Flom, LLP. Medco's advisers are J.P. Morgan Chase & Co, Lazard Ltd, and law firms Sullivan & Cromwell LLP and Dechert LLP.
(Reporting by Lewis Krauskopf and Ransdell Pierson; additional reporting by Ben Hirschler in London and Renju Jose in Bangalore; Editing by Derek Caney and Maureen Bavdek)
