CVS to Buy 1,600 Drugstores From Target for $1.9 Billion

The voracious CVS Health is already a dominant player in nearly every corner of the health care world — it is the nation’s largest dispenser of prescription drugs, the biggest operator of health care clinics and the second-largest pharmacy-benefits manager.

And with the news Monday that it had agreed to buy Target’s pharmacy and clinic businesses in a deal worth about $1.9 billion, it demonstrated that its appetite shows no signs of abating.

CVS Health is building a business that has a lot of interlocking synergies in many different parts of the health care system,” said Adam J. Fein, president of Pembroke Consulting, a management advisory and business research company based in Philadelphia. “The Target deal is one more step in their goal of becoming the most significant company in the drug distribution and reimbursement system.”

Under the terms, CVS, which is based in Woonsocket, R.I., would acquire more than 1,600 pharmacies from Target in 47 states and operate them under the CVS name in Target stores. CVS will also operate branded pharmacies in new Target stores that offer pharmacy services.

CVS said it planned to rebrand about 80 clinic locations previously operated by Target under the MinuteClinic name, adding that they would be part of its plan to operate 1,500 clinics by 2017.

The transaction is expected to significantly increase sales and prescriptions, CVS said.

“This strategic relationship with Target supports the highly complementary customer base, brand and culture we share,” Larry J. Merlo, the president and chief executive of CVS, said in a news release. “This relationship with Target will provide consumers with expanded options and access to our unique health care services that lead to better health outcomes and lower overall health care costs.”

Mr. Fein said the deal would allow CVS to expand its business into areas of the country, like the Pacific Northwest, where its presence is weak. That could, in turn, improve the strategic position of some of CVS’s other businesses, especially CVS/caremark, its pharmacy benefits business. One of the company’s signature offerings is its Maintenance Choice plan, which allows customers to choose between having their long-term prescription medications mailed to them or picking them up at a local CVS store.

Employers in those regions may be more likely to select CVS/caremark to manage their drug benefits if employees had a convenient option for picking up their prescriptions, he said.

CVS and Target, which is based in Minneapolis, also plan to develop five to 10 small stores over a two-year period after the deal closes. These would be branded as TargetExpress and include a CVS pharmacy.

The transaction, which is subject to regulatory approval, represents the latest retrenchment for Target, which this year announced plans to close the last of its stores in Canada after a money-losing expansion outside the United States.

CVS said it would offer the 14,000 in-store Target health care employees comparable positions with CVS.

Less than a month ago, CVS agreed to buy Omnicare, which distributes prescription drugs to nursing homes and assisted-living operations, forabout $12.7 billion, including debt.

Mr. Fein said the deal made sense for Target and noted that mass-market retailers often struggled with how to incorporate pharmacies into their larger business strategy. “Target operates one of the largest pharmacies in the U.S., but it’s a very small part of their stores,” he said.

Nevertheless, Target’s pharmacies earned favorable marks from consumers, performing above the average for mass merchandisers in a2014 J. D. Power study of customer satisfaction with pharmacies. CVS, by contrast, scored below average for chain drugstores.

Craig Johnson, president of the New Canaan, Conn.-based retail consulting firm Customer Growth Partners, said that the deal offered Target welcome cash to offset losses made on its short-lived foray into Canada. Beyond that, the partnership could help Target’s bid to expand its reach into urban centers with smaller-format “City” or “Express” stores.

“It is evident that pharmacy must play an essential role in driving the traffic necessary to making these formats successful,” Mr. Johnson said. “Having CVS as operator allows these stores to open with a running start.”

Target’s decision to hand its health care business to CVS represents a different model than one of its competitors, Walmart, which has recentlyopened primary care clinics in some of its stores as part of a play for the billions of health care dollars being spent in the United States each year.

“This is a win-win for both companies, which have compatible cultures and each face an older, more traditional and somewhat less stylish competitor in Walmart and Walgreens,” Mr. Johnson said.

On a conference call with analysts, Brian Cornell, Target’s chief executive officer, said that while the CVS deal would reduce the retailer’s sales by more than $4 billion annually, it would also significantly reduce its costs, which were high because of the retailer’s lack of scale in the pharmacy business.

The deal would also allow Target to refocus its efforts on its food business, where it is making a big push into natural and organic produce to take on the likes of Whole Foods Market and Trader Joe’s.

“This transaction will free up our resources we can deploy in support of our key growth priorities,” including wellness, style and baby and children’s products, Mr. Cornell said.

CVS is the largest pharmacy company in the United States, based on prescription revenue, when sales at its retail stores and mail-order pharmacy are included. In 2014, its retail outlets had $67.8 billion in prescription revenue, while its pharmacy services segment had sales totaling $88.44 billion.

Barclays and the law firms Fried Frank and Dechert advised CVS, while Goldman Sachs and the law firms Faegre Baker Daniels; Wachtell, Lipton, Rosen & Katz; and Dorsey & Whitney advised Target.

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