CVS buys Target pharm biz for $1.9B

Nathan Bomey | USA TODAY

Drugstore chain CVS Health (CVS) will acquire big-box retailer Target's (TGT) pharmacy and clinic business for $1.9 billion, the companies said Monday.

The deal comes a little less than a month after CVS entered into an agreement to acquire Omnicare, for about $12.7 billion, in a move to expand its presence in the senior care market.

More than 1,660 Target pharmacies in 47 states will be rebranded as CVS/pharmacy. Target's clinics, nearly 80 in total, will be renamed MinuteClinic.

The retailers are getting cozier on another front, too. Target will seek five to 10 locations for new small-format Target Express stores that would also have a CVS/pharmacy inside.

"This long-term strategic relationship will certainly benefit the patients, the employees and the shareholders of both companies," CVS Health CEO Larry Merlo said in a conference call.

CVS will offer comparable positions to all of Target's 14,000 pharmacy and clinic workers. Target appeared to leave the door open for cuts at the corporate level, however, saying it will "further evaluate the business impact and related support needs at its headquarters locations."

The deal comes as Target is reassessing its business priorities in a bid to sharpen its strategy in a dynamic competition with online retailers such as Amazon.com and big-box rivals such as Walmart.

Target CEO Brian Cornell said the exceedingly complex health care business is not a good fit for Target, which lacks the scale and expertise to thrive in the pharmacy world.

"Everything we do and how we do it has been on the table and up for review," he said on a conference call, adding that it's critical Target becomes a "faster-moving, more agile organization."

Cornell clarified, however, that Target is not currently seeking to sell any of its other core businesses. He also said he expects Target's foot traffic to increase following the deal.

CVS also said it would open 20 new clinics in Target stores within three years of the deal's closing.

The deal is worth $1.2 billion to Target after taxes. The company said it would use the cash to boost its "long-standing capital priorities," including share buybacks.

Target's pharmacy business has about $4 billion annual sales. Target said its profit margins would rise following the deal.

CVS said it would increase its debt load to do the deal and pledged to start chopping its debt over time. But the company said it would reduce its share buyback plan for 2015 by $1 billion to help fuel the transaction.

In its deal with Omnicare, CVS will assume $2.3 billion of the company's debt. Omnicare, the nation's largest provider of pharmaceutical services in nursing homes, has 160 locations in assisted living and long-term care facilities in 47 states in the U.S.

To finalize the deal, the retailers will have to secure regulatory approval from the U.S. government. Officials suggested the deal could be finished by about the end of 2015, though they said the timing is uncertain.

Spokespeople for both companies declined to say whether CVS would accept all insurance plans that Target accepts. Nothing changes for now.

"Target guests will receive communication prior to any changes taking effect," CVS spokeswoman Carlyn Castel said in an email.

Merlo said his personal relationship with Target's Cornell helped make the deal possible.

"I have always been a fan of his," Merlo said. "That relationship helped to create a level of trust and confidence."

Merlo downplayed the suggestion that the relationship could spawn brand confusion. CVS customers purchase an average of three items per trip, he noted.

"The customer is using Target and CVS/pharmacy very differently," Merlo said.

By positioning CVS in Target stores, he believes the chain can reach more consumers. The deal puts CVS in several new markets, including Seattle, Denver and Portland, Ore.

CVS will pay $20 million to $25 million in annual rent to Target for the pharmacy and clinic space, CVS Chief Financial Officer Dave Denton said.

Follow USA TODAY reporter Nathan Bomey on Twitter @NathanBomey.