NEW YORK (
(CVS - Get Report)
$1.25 billion acquisition of
Universal American's Medicare's
(UAM - Get Report)
Medicare Part D business could be a nice "tuck-in" for the company as long as CVS does not repeat its history with integrations in the pharmacy benefit management (PBM) space, says Jeff Jonas, an analyst at Gabelli & Co.
The biggest issue confronting the deal's success is likely to be the integration, with which CVS has had a rocky past. Its last PBM integration was the Caremark deal.
"That was an issue for them. The biggest issue was in the marketing message: convenience, and customers wanted low prices. They didn't quite have the right messege," explains Jonas. "CVS wound up losing a bunch of customers they served in the Medicare Part D business because when they submitted their bids, they were higher than competitors."
Jonas says that with new management, the integration could go better. He points out that CVS could also use the synergies between the comapnies to reinvest in comparative rates.
"The deal should give them a small addition to earnings that will be accretive immediately," said Jonas. "CVS could get 5 to 10 cents per share on earnings by 2012, when the deal is fully integrated. "
The price of eight times EBITDA was "fair" for the shareholders of both comapnies, Jonas said. Similar PBM deals that included sales books and claims processing such as the
(ESRX - Get Report)
NextRx for $4.6 billion in 2009 went for 12 times EBITDA because they included more products.
In 2011, CVS Caremark is likely to continue to make even smaller tuck-in deals.
"They are focused on increasing dividend and then buying back stock," Jonas said. "If they do anything to strengthen on the PBM side they have this partnership with
with genetic testing or they could strengthen in their specialty-drug business. They could also make acquisitions on their retail side. They have a hole in the Pacific Northwest they could fill in there."