Revco (CVS) Overview

Revco

The American healthcare corporation CVS Health Corporation is the owner of a number of well-known brands, including Aetna, CVS Caremark, and CVS Pharmacy, a chain of retail pharmacies. The corporate office is located in Woonsocket, Rhode Island.

Formerly headquartered in Twinsburg, Ohio, Revco Discount Drug Stores (also known as Revco or Revco, D.S.) was a significant drugstore chain that served the Ohio Valley, the Mid-Atlantic regions, and the Southeastern United States. The New York Stock Exchange’s ticker symbol for the chain’s stock was RXR. In February1997, CVS Pharmacy purchased Revco for $2.8 billion. It was one of the “big five” pharmacy businesses before CVS purchased it. The chain had almost 2,500 locations at the time it was sold.

In February1997, CVS Corp., which operates 195 locations in the Washington, D.C., area, announced plans to purchase Revco DS Inc. for $2.8 billion in stock, creating the second-largest pharmacy chain in the country.

The combined company would have 4,000 locations throughout 24 states, the most of them on the East Coast, in the Midwest, and in some areas of the Southeast, and $13 billion in annual revenue if the acquisition is authorized by federal antitrust regulators.

The deal was a part of the rush toward retail pharmacy industry consolidation, which was sparked by managed-care insurers looking for significant prescription price cuts as well as by rivalry between mail-order drugstores and supermarket pharmacies. Due to rising pricing pressure, pharmacies had to expand to boost their purchasing power and lower overhead costs.

FTC [federal trade comission] authorities remained silent on the transaction despite industry analysts’ expectations that they would closely examine it. Rite Aid Corp., the biggest drugstore chain in the nation, abandoned a $1.8 billion offer for Revco in April of the previous year after authorities from the government indicated they intended to launch a lawsuit to prevent the acquisition.

Due to the fact that their chains do not overlap as much as Rite Aid and Revco’s do, CVS and Revco officials expressed optimism about receiving FTC approval. This gives them less control over pricing.

According to CVS spokesman Fred McGrail, “We actually operate in different markets, there is limited overlap.” We’ve already collaborated with the FTC, and we’ll do so once more in an effort to close this agreement by the middle of the year.

The FTC will investigate whether a combined CVS-Revco would control more than 35% of the chain drugstore market in a certain region or would leave that market with only two chains, according to antitrust experts.

According to Joe Sims, an antitrust lawyer at Jones, Day, Reavis & Pogue in the District, “they’ll require the company to divest anywhere in any place with more than 35 percent of the market.”

In the event that CVS and Revco merge, industry experts predict that regulators will be concerned about whether pharmacy benefit management (PBM) firms, which negotiate prescription drug services for enrollees on behalf of insurers, can preserve bargaining leverage. These businesses are responsible for lowering prescription drug costs by setting up a network of retail locations where enrollees can get their medications at a lower cost from their carriers.

According to Steven Sallop, an economist and law professor at Georgetown University Law School, “the FTC will be concerned that CVS-Revco could be so big in some markets following the merger that pharmacy benefit managers will have no choice but to deal with the merged business.” Many PBMs [pharmacy benefit managers] can now assert, “We need CVS or Revco, but not both,” and then compete with one another to keep costs down.

As a result of the limited market overlap between CVS and Revco, analysts predicted that the merger would be approved by regulators.

According to Andrew L. Weinberg, an analyst with Raymond James, a brokerage with headquarters in St. Petersburg, Florida, “there’s not nearly the overlap that you saw with the Rite Aid-Revco deal.” I predicted that only 100 stores would close as a result of the acquisition.

Weinberg noted that, if authorized, the acquisition might assist customers by establishing a business with the purchasing power to obtain better press.

While minimal layoffs are anticipated, Revco’s offices in Twinsburg, Ohio, will gradually be phased away. The combined businesses will be run and managed out of the CVS headquarters in Woonsocket, Rhode Island.

Gary M. Stibel, founder of the New England Consulting Group and strategic management advisor to some of the biggest retailers in the nation, said: “Stockholders should recognize that it would be silly if they played pig and held out for more money than CVS is willing to give.” “CVS values Revco higher than Revco values CVS.”

But according to industry agreements where corporations have paid up to 16 times the earnings of a takeover target, Julie Silberstein, an analyst with Bankers Trust New York, asserted that there was plenty of opportunity for a premium. She predicted that the cost might be as high as $3.2 billion.

The acquisition would be advantageous for CVS, according to Ms. Silberstein. They would be able to spread out overhead costs across a broader store base and compete with bigger, more established national merchants.

According to the terms of the agreement, each share of Revco stock would be exchanged for one share of CVS stock, valued at the stock’s closing price on Thursday, February6,1997, of $40.63 1/2. Additionally, CVS would take on nearly $900 million in debt from Revco.

On February 7th,1997, CVS stock finished on the New York Stock Exchange at $47.121/2, up $3.12 1/2. On the NYSE, Revco shares ended the day at$41, up $3. CVS/PHARMACY Headquarters would continue to be in Woonsocket, Rhode Island after the merger. Investors raised Revco’s share price $2 in early trade following news of a potential merger between the two businesses, causing it to reach a 52-week high of $41. Later on, though, they had to temper their enthusiasm, and the stock ended the day down 37.5 cents at $38.875. Shares of Revco have increased by more than 10% during the past two weeks of the announcement.