Summary: CVS will purchase Target’s pharmacy business for close to $2 billion.
According to the Wall Street Journal, CVS Health Corp. announced on Monday that it will pay $1.9 billion to purchase and operate Target Corp.’s pharmacies and clinics. The drugstore chain will then have roughly 1,700 more locations to provide its expanding healthcare services.
As a result of the purchase, Target pharmacies will be rebranded as CVS/pharmacy and will operate as separate stores within a store. Target’s close to 80 clinics will become CVS MinuteClinics.
Target must pay $10 million to settle a data breach lawsuit.
Target will now be able to get rid of a business it used to lure shoppers into stores, but one that did not provide stronger profitability of areas Target wanted to focus on, such as style, kids, and baby. Target’s health-care services will also be widened at a time with Wal-Mart Stores Inc. is also expanding its health services.
Target will look to its much bigger rival, CVS, to complete this goal. Shoppers have often run into CVS and other small local stores instead of driving to larger stores like Target. CVS reported $139.4 billion in revenue last year and operates 7,800 stores. According to Reuters, it is the second-largest drugstore operator in the United States. Target reported $72.6 billion in revenue last year and has 1,795 stores.
Securities filings note that CVS’s rights to operate Target’s pharmacies is “perpetual,” with few options for ending the relationship.
CVS initiated expanding its role as a drug distributor last month with its $10.4 million agreement to purchase Omnicare Inc.
The CEO of Target stepped down last year.
The deal between CVS and Target must be approved by regulators, but it is not clear when this may happen.
The companies will essentially be dividing up their overlapping markets so that each gets the business they have focused on: CVS gets more pharmacy customers after it centered on health, and Target will have more customers who seek more goods. The companies also said that they will co-develop smaller format stores that will be called TargetExpress. According to USA Today, roughly 5-10 locations are being sought for TargetExpress stores.
CVS expects the deal to trigger major sales and prescription volumes, while increasing its presence in newer markets like Portland and Seattle.
Target hopes to increase its focus on wellness and improve long-term traffic. It expects an additional $1.2 billion after taxes, which it may use to finance share buybacks.
Last year, CVS announced that it would no longer sell tobacco products.
After a tough stretch of weak sales, Target has refocused itself on categories that are more profitable, such as apparel and home goods. Its pharmacies have not stood out, since it mostly sold basic prescriptions. There was not a competitive auction for its pharmacies.
Source: Wall Street Journal
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