Express Scripts Stands Pat

Caremark shares fall as a bidding war appears to come to an end.
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Caremark

(CMX)

shareholders can stop waiting around for a better deal.

Now,

Express Scripts

(ESRX)

has joined

CVS

(CVS) - Get Report

in saying it has made its final offer for the Nashville, Tenn., mail order pharmacy.

The move sent shares of Express Scripts soaring, up 5% in heavy trading, and those of Caremark and CVS down 3% each. At recent levels, the Express Scripts deal is worth $63.81 a Caremark share and the CVS deal $60.31. Caremark slid $1.76 Monday to $60.14.

The trading seems to suggest that Wall Street now believes Caremark investors will approve the CVS merger at a meeting Friday. The deal with CVS has won unanimous support from company leaders but has been harshly criticized by proxy advisory firms that feel shareholders should hold out for something better.

For its part, Express Scripts claims that it can offer no more unless Caremark opens up its books so Express Scripts can see what it is actually buying.

"We cannot in good conscience offer more consideration without an opportunity to conduct confirmatory due diligence," CEO George Paz said.

The company's stand seems reasonable to some.

"We believe that ESRX could provide a superior offer if CMX would allow ESRX to complete confirmatory due diligence," Jefferies analyst Arthur Henderson wrote last week. But "CMX management has so far resisted any attempt by ESRX to sit down and talk.

"It is this resistance, we believe, that explains why shareholder adviser CtW Investment Group reiterated its recommendation to CMX shareholders yesterday afternoon to reject the CVS offer."

Henderson, for one, believes that Express Scripts would make a better partner. But he likes Express Scripts whether the company joins forces with Caremark or not. His firm makes a market in Express Scripts securities.

Meanwhile, Wachovia analyst Matt Perry hopes that Express Scripts walks away from Caremark altogether.

"Given ESRX's discipline in their most recent offer and our belief that ESRX needs to raise its offer by at least 5% to succeed, we would not be surprised to see ESRX stand firm on its current offer," Perry wrote last week. "Personally, "we would prefer to see ESRX remain as a standalone company."

If that happens, Perry predicts, Express Scripts could see its stock boosted as the company aggressively repurchases its shares and removes pressure caused by the takeover battle for Caremark.

Perry's firm hopes to provide investment banking services to Express Scripts over the next three months. It has non-investment banking ties to Caremark.

A.G. Edwards analyst Andrew Speller foresees Express Scripts operating on its own. Importantly, he notes, Express Scripts still needs regulatory clearance for its own merger proposal. To offset this big risk, he believes, Express Scripts needs to boost its offer significantly -- to the mid to upper $60s -- and could still face defeat in the end.

"The ball is now in Express Scripts' court," Speller wrote last week. "If ESRX can give CMX shareholders some idea of the issues that the

Federal Trade Commission is concerned about, then perhaps CMX shareholders will give more weight to its bid."

Otherwise, he concludes, "we currently feel that the momentum has swung back to CVS -- which we believe has an approximate 75% chance of gaining CMX shareholder approval" this week.

Speller's firm has been shorting Express Scripts' stock in the meantime. It has no position in Caremark.