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CVS Health to Buy Target's Pharmacy Business for $1.9B - Analyst Blog

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CVS Health Corporation CVS has taken a groundbreaking decision to buy the pharmacy and clinic businesses of retail giant Target Corporation TGT for $1.9 billion. This strategic agreement reflects a bold move on CVS Health’s part to enhance its presence across the country by expanding into new markets such as Seattle, Denver, Portland and Salt Lake City.

The deal seeks to combine the expertise of two retail giants in the U.S., taking forward both their goals of investing in core businesses that help drive growth. The acquisition will expand CVS Health's customer base, add a new retail channel for its products and augment customer convenience. The transaction is, however, subject to customary closing conditions, including necessary regulatory clearances.

Per the terms of the deal, CVS Health will take possession of over 1,660 pharmacies of Target across 47 states and will operate them under the brand name – CVS/pharmacy within Target stores. Moreover, all new Target stores that provide pharmacy services will incorporate a CVS/pharmacy in it.

Moreover, CVS Health plans to rebrand 80 clinic locations, earlier operated by Target, under the MinuteClinic name and open up to 20 new clinics in Target stores within three years of the deal closure. These new clinics will be part of CVS Health’s plan to operate 1500 clinics by 2017.

Further, both the companies plan to develop 5-10 small flexible format stores over a two-year period, post the deal’s closure. Each of these stores will incorporate a CVS/pharmacy and run under the TargetExpress brand name. Following the completion of the transaction, CVS Health customers will have access to an expanded, one-stop Target shopping experience, including apparel, home, fresh food and more, simultaneously while seeking health care services.

Moreover, CVS Health will offer suitable positions to the 14,000 health care professionals employed in Target’s stores as part of the transition. Given that CVS Health is a dominant player in the U.S. retail drug market, Target also stands to benefit from this collaboration through additional customer traffic and potentially stronger sales over the long run.

CVS Health, on its part, expects significant growth in sales and prescription volumes in the near future. Over the long term, this deal should generate significant operating profit for the company and encourage management to explore innovative, profitable offerings for its customers jointly with Target.

Assuming that the deal closes by the end of 2015, the transaction is expected to add 6 cents to CVS Health’s adjusted earnings per share (EPS) in 2016, 10 cents in 2017 and 12 cents in 2018 and beyond.

However, in conjunction with CVS Health’s recent plan to acquire Omnicare, which the company announced in May 2015, this deal will increase the company’s debt load. To compensate that, CVS Health has reduced its share repurchase plans for 2015 by $1 billion to $5 billion. This, in turn, has trimmed the company's 2015 adjusted EPS guidance by a penny and the same for 2016 by approximately 4 cents.

Nevertheless, given the company’s proven success in growing its business, we believe this acquisition will further CVS Health’s cause to offer the best-in-class pharmacy and medical clinic services to its customers at reduced costs, while also raking in higher profits at the company.

Currently CVS Health carries a Zacks Rank #3 (Hold) while Target holds a Zacks Rank #2 (Buy). Some medical stocks that warrant a look are Bio-Rad Laboratories, Inc. BIO and Vascular Solutions Inc. VASC. Both the stocks sport a Zacks Rank #1 (Strong Buy).

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