SXC Health Buys Catalyst for $4.4B as Pill Pushers Consolidate (Update 1)

(Updated to reflect analyst comments and additional data)

NEW YORK (TheStreet) -- SXC Health Solutions (SXCI) is buying Catalyst Health Solutions (CHSI) for roughly $4.4 billion in a cash and stock deal that will continue consolidation in the pharmacy drug benefits manager (PBM) space.

The merger, which values Catalyst Health Solutions at $81.02 a share, or a 28% premium to Tuesday's closing price, comes on the heels of a Federal Trade Commission approval of a blockbuster $29.1 billion acquisition of Medco Health Solutions (MHS) by Express Scripts (ESRX) earlier this month that may create the largest player in the space.

After that approval earlier, Express Scripts shares surged on expectations that the tie-up would create higher-than-expected cost savings. Traders initially viewed the latest PBM offer offer as a positive for SXC Health Solutions, pushing its shares nearly 8% higher. Meanwhile, Catalyst Health Solutions shares rose over 31% in Wednesday trading at $83.29.

The latest PBM deal was anything but a surprise on Wall Street.

"We viewed a deal with CHSI as inevitable, given difficulties small PBMs face scaling up their businesses organically that were particularly daunting for CHSI and their common technology platforms," wrote Bank of America Merrill Lynch analyst Robert Willoughby in a Wednesday note to clients.

As a result of competitive challenges to Catalyst Health Solutions reflected in the company's falling profits, Willoughby expected a deal to materialize at lower prices, but reiterated a "buy" rating and $90 a share price target on SXC Health Solutions shares as a result of high expected synergies.

In a Tuesday research note prior to the deal announcement, Goldman Sachs analysts raised their price target of SXC shares to $91 a share on the potential for a tie up between it and Catalyst Health Solutions. "With the Express-Medco merger closed, we expect consolidation to continue as top PBMs vie to close the market share gap," noted Goldman Sachs.

"Under this backdrop, we see SXCI and CHSI as potential M&A candidates given their (1) relative smaller scale...(2) complementary client mix, and (3) synergy opportunities from lagging profitability metrics."

In the cash and stock offer, SXC will pay Catalyst $28 a share in cash and will make the remaining purchase price in a 0.6606 per share stock conversion. While the deal initially values SXC at $81.02, a share price based on Tuesday's close, the near 8% jump in the company's stock to $86.45 in early afternoon trading makes the offer richer.

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