On Wednesday, Catalyst Health Solutions Inc.
(CHSI) announced that it has entered into a $4.4 billion takeover
agreement with rival pharmacy benefits management (PBM) company,
SXC Health Solutions Corp. (SXCI). As per the
agreement, SXC Health will acquire Catalyst Health for $28 per
share in cash and 0.6606 shares of SXC Health in exchange of every
share of Catalyst Health.
Considering the closing share price of the two companies on
April 17, 2012, the agreement terms translate into a purchase price
of $81.02 per share of Catalyst Health, representing a 28% premium
on Catalyst’s closing price of $63.54 on April 17. Following the
acquisition, the shareholders of SXC Health and Catalyst Health
will own 65% and 35% of the combined company, respectively.
The takeover is expected to be completed by the second half of
this year, subject to the approval of U.S. anti-trust authorities
and shareholders of Catalyst Health and SXC Health as well as other
customary closing conditions.
JP Morgan Chase & Co. (JPM) is set to
finance the cash portion of the purchase consideration for SXC
Health. JP Morgan also acted as the company’s financial advisor for
the deal along with Barclays Plc (BCS), while
Goldman Sachs Group Inc. (GS) and
Citigroup Inc. (C) were the financial advisors for
Catalyst Health. Meanwhile, Sidley Austin and Milbank, Tweed,
Hadley & McCloy acted as the legal advisors for SXC Health and
Catalyst Health, respectively.
The deal is expected to be accretive to SXC Health’s earnings
from 2013. The benefits of economies of scale and improved
operating leverage, arising from the takeover, are expected to
generate operating cost synergies of $125 million annually for SXC
Health in the first 1.5-2 years after the acquisition. Moreover,
the deal is expected to drive the annual revenues of the company to
$13 billion.
However, SXC Health will have to bear transition costs of
$40–$45 million, while amortization costs related to the takeover
will amount to $200 million for the first year after the
acquisition. Additionally, SXC Health will borrow $1.7 billion to
finance the takeover and this will increase the company’s annual
interest expense to about $70 million.
Nevertheless, the combined company is expected to generate
enough cash to repay its debt obligations and invest in various
growth initiatives, despite incurring increased expenses.
The acquisition will increase SXC Health’ operations
substantially, thereby placing it in the same league as the three
largest PBM companies – Express Scripts Holding
Co. (ESRX), CVS Caremark Corporation
(CVS) and UnitedHealth Group Inc. (UNH). The
membership base of SXC Health is expected to grow to 25 million
following the merger, while the annual prescription volume is
expected to surge to over 200 million, making it the second largest
independent PBM company in the U.S. in terms of prescription
volume.
The merger will help the two companies to retain their
competitive advantage in the rapidly consolidating PBM industry,
which is leading to intense price competition. Just two weeks ago,
Express Scripts acquired Medco Health Solutions for $29 million and
emerged as the largest player in the industry, with almost
one-third share of the total prescription volume.
However, when the news of the proposed takeover broke, Catalyst
Health came under fire with a number of investigations leveled
against it. Law firms Rigrodsky & Long, P.A., Block &
Leviton LLP, Harwood Feffer LLP, The Briscoe Law Firm PLLC, Powers
Taylor LLP, Brower Piven, Levi & Korsinsky LLP, Weiss &
Lurie, Robbins Umeda LLP, Faruqi & Faruqi LLP and Glancy Binkow
& Goldberg LLP announced investigations against the Board of
the company to determine whether it performed its fiduciary duty by
ensuring the best possible pricing for the company, as they
consider the premium low.
The law firms are concerned that the Board might have failed to
maximize shareholders’ value by under-pricing the deal. The
concerns cropped up following the news that two directors of the
company will join the Board of SXC Health after the merger.
Nevertheless, the integration of the two companies is expected
to be smooth as Catalyst Health already uses SXC Health’s claims
processing technology. Moreover, SXC Health shares Catalyst
Health’s customer-centered approach as well as commitment to
lowering healthcare costs without compromising on the quality.
The clients of Catalyst Health will benefit from the takeover as
they will be able to reap the benefits of SXC Health’s expertise in
PBM as well as its industry-leading technology. They will also have
access to a wider product portfolio. SXC Health’s current
headquarters in Lisle, Illinois will be the headquarters of the
merged entity and the company’s current CEO will act as the CEO of
the merged entity.
Currently, Catalyst Health holds a Zacks #3 Rank, implying a
short-term Hold rating, while SXC Health carries a Zacks #2 Rank,
which translated into a short-term Buy rating. We maintain our
long-term Neutral recommendation on Catalyst Health.
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CATALYST HEALTH (CHSI): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
SXC HEALTH SOL (SXCI): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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