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Peridot Capital Management LLC

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Peridot Capital Management LLC

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After Losing Caremark Bid, Will Express Scripts Target Medco Next?

March 20, 2007 Chad Brand, Peridot Capital Management LLC
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Shares of Express Scripts (ESRX) have been on fire lately, rising 30% within months as the company tried to pry competitor Caremark Rx (CMX) from CVS (CVS). Somewhat surprisingly, ESRX shares have jumped to over $84 on news that the CVS deal was approved by shareholders, officially ending Express' bid. With shares trading at 20 times 2007 earnings projections, the stock isn't cheap. What might they do next to keep the share price humming along?

It appears they have three choices. They can remain independent, pair up with another pharmacy chain to match Caremark's move, or do a vertical deal like the one they wanted to do with Caremark. In the latter case, the only big option out there is merging with Medco Health Solutions (MHS). While Medco has $5 billion more in annual sales than Caremark, a buyout would actually cost less, about $20 billion versus $27 billion. A partnership with Rite Aid (RAD) or Walgreens (WAG) would also be a good bet if ESRX feels they need to do something to remain on a level playing field with Caremark.

Given that they fought so hard to get Caremark, it would not surprise me at all if Express Scripts tried to get some sort of deal done. However, barring any accretive deal announcement, the stocks of the pharmacy benefit managers trade at 20 times current year earnings, which is at the high end of their typical trading range. As a result, they appear to be close to fully valued at current levels.

Full Disclosure: No positions in the companies mentioned at time of writing

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Peridot Capital Management LLC is a registered investment advisor in the states of Maryland, Texas, and Washington. The firm may not transact business in states where it is not registered or exempted from registration. In most states, the firm is exempt from registration if it has fewer than six clients who are residents of that state. As a result, Peridot Capital Management LLC is free to provide services to residents of every state and applies for registration as required. Individualized responses to persons that involve either the effecting of transactions in securities, or the rendering of personalized investment advice for compensation, will not be made without registration or exemption.

The content published on our blog represents the opinions of Mr. Brand and he and/or his clients may hold positions in securities discussed. Such positions will be disclosed at the time of publication, although subsequent changes to those positions will be made without notification. The information contained in blog posts is believed to be accurate when published, however, mistakes could be made. As a result, do not rely on the content exclusively for your investment due diligence. The commentaries published do not constitute investment advice, as readers’ personal investment goals and risk tolerances will dictate which investments are appropriate for them. Our blog is meant to be one of many sources for readers to conduct their own research into specific investments. Consult an investment professional before acting solely on information found on this site. If you do not have an investment professional to work with, you may contact Peridot Capital Management LLC directly.