Catalyst Health Acquired by SXC - Analyst Blog
July 05 2012 - 11:48AM
Zacks
On Monday, Catalyst Health Solutions Inc. was acquired by rival
pharmacy benefits management (PBM) company, SXC Health
Solutions Corp. (SXCI). Subsequently, Catalyst Health was
de-listed from the New York Stock Exchange, on which it previously
traded under the ticker symbol CHSI.
Per the agreement, SXC Health acquired Catalyst Health for $28
per share in cash and 0.6606 shares of SXC Health in exchange of
every share of Catalyst Health. Taking into account the closing
share price of both the companies on June 29, 2012, the agreement
terms translate into a purchase consideration of $4.75 billion.
Following the acquisition, the shareholders of SXC Health and
Catalyst Health own 65% and 35% of the combined company,
respectively.
JP Morgan Chase & Co. (JPM) financed the
cash portion of the purchase consideration for SXC Health. JP
Morgan also acted as the company’s financial advisor for the deal
along with Barclays Plc (BCS), while
Goldman Sachs Group Inc. (GS) and
Citigroup Inc. (C) were the financial advisors for
Catalyst Health. Meanwhile, Sidley Austin and Milbank, Tweed,
Hadley & McCloy acted as the legal advisors for SXC Health and
Catalyst Health, respectively.
The deal is expected to be accretive to SXC Health’s adjusted
earnings from 2013. The benefits of economies of scale and improved
operating leverage, arising from the takeover, are expected to
generate operating cost synergies of $125 million annually for the
company in the first 1.5-2 years after the acquisition. Moreover,
the deal is expected to drive the company’s annual revenues to $13
billion.
However, SXC Health will have to bear transition costs of
$40–$45 million, while amortization costs related to the takeover
will amount to $200 million for the first year after the
acquisition. Additionally, SXC Health borrowed $1.7 billion to
finance the takeover, which increased the company’s annual interest
expense to about $70 million.
Nevertheless, the combined company is expected to generate
enough cash to repay its debt obligations and invest in various
growth initiatives, despite incurring increased expenses.
The acquisition will enhance SXC Health’s operations
substantially, thereby making it the fourth largest PBM company
after Express Scripts Holding Co. (ESRX),
CVS Caremark Corporation (CVS) and
UnitedHealth Group Inc. (UNH). The membership base
of SXC Health is expected to grow to 25 million following the
merger, while the annual prescription volume is expected to surge
to over 200 million. The merger will aid both the companies to
retain their competitive advantage in the rapidly consolidating PBM
industry, which is leading to intense price competition.
The integration of the two companies is expected to be smooth as
Catalyst Health already uses SXC Health’s claims processing
technology. Moreover, SXC Health shares Catalyst Health’s
customer-centered approach as well as commitment to lowering
healthcare costs without compromising on the quality.
The clients of Catalyst Health will benefit from the takeover as
they will be able to reap the benefits of SXC Health’s expertise in
PBM as well as its industry-leading technology. They will also have
access to a wider product portfolio. SXC Health’s current
headquarters in Lisle, Illionis, will be the headquarters of the
merged entity and the company’s current CEO will act as the CEO of
the combined entity.
Currently, SXC Health holds a Zacks #3 Rank, implying a
short-term Hold rating.
BARCLAY PLC-ADR (BCS): Free Stock Analysis Report
CITIGROUP INC (C): Free Stock Analysis Report
CVS CAREMARK CP (CVS): Free Stock Analysis Report
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
GOLDMAN SACHS (GS): Free Stock Analysis Report
JPMORGAN CHASE (JPM): Free Stock Analysis Report
SXC HEALTH SOL (SXCI): Free Stock Analysis Report
UNITEDHEALTH GP (UNH): Free Stock Analysis Report
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