NEW YORK – Fitch Ratings says CVS Corp. remains on “Rating Watch Positive” following last night’s announcement of its modified offer for Caremark Rx Inc.
Fitch had originally placed CVS on that status on Nov. 1, following the announcement that CVS had entered into a merger agreement with Caremark. Still on watch are CVS’ Issuer Default Rating (IDR), senior unsecured notes and senior unsecured banking facilities ratings of BBB and its commercial paper rating of F2.
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In addition to the original terms of the agreement – under which Caremark shareholders are to receive 1.67 shares of CVS stock for each share of Caremark stock – a special one-time cash dividend of $2 is to be paid to Caremark shareholders. Also, following the close of the transaction, CVS is to retire 150 million, or about 10 percent, of the outstanding shares in the new company.
The special dividend and share repurchase will total about $5.65 billion in cash, which Fitch expects CVS/Caremark would fund using available cash on hand and additional debt. The company has in place bank commitments for $5 billion to fund the share-repurchase program.
Despite the expected increase in debt balances, Fitch said it expects the combined company’s credit metrics should improve from current levels. In addition, debt balances should decline and credit metrics should improve over time, as the new company’s anticipated strong cash-flow generation allows it to reduce outstanding commercial paper balances, while also reinvesting in the business.
(For the most recent 12-month period, ending Sept. 30, CVS maintained adjusted leverage of 3.9 times and EBITDAR interest coverage of interest and rent of 3.0 times, the ratings company said.)
The combined company, which would have proforma revenues of $75 billion, will have strong market positions, holding the number-one position in retail pharmacy sales as well as in pharmacy benefit management (PBM) lives managed, Fitch said.
In addition, the merger will diversify the company’s business risk, increase the scope and range of services offered and strengthen its buying power. Of concern, the ratings company said, is the ability of the combined company to successfully integrate the two organizations while maintaining strong operating performance in the core businesses.
