On Monday, Catalyst Health Solutions Inc. was acquired by rival
pharmacy benefits management (PBM) company,
SXC Health Solutions Corp.
). Subsequently, Catalyst Health was de-listed from the New York
Stock Exchange, on which it previously traded under the ticker
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,
JP Morgan Chase & Co.
) 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
Goldman Sachs Group Inc.
) 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,
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
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
Express Scripts Holding Co.
CVS Caremark Corporation
UnitedHealth Group Inc.
). 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
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.
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