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CVS agrees to buy Oak Street Health in $10.6 billion deal

It’s the drugstore chain’s second major patient primary care acquisition in the space in as many years.

A CVS store sign is displayed in Pittsburgh on Friday, Feb. 3, 2023. CVS Health is plunging deeper into primary care services, buying Oak Street Health for approximately $10.6 billion. The drugstore chain said Wednesday, Feb. 8, 2023, it would pay $39 per share in cash for each share of Oak Street Health in a deal expected to close this year.Gene J. Puskar/Associated Press

CVS Health Corp. agreed to buy Oak Street Health Inc. for an enterprise value of $10.6 billion, pushing deeper into patient primary care with its second major acquisition in the space in as many years.

The drugstore chain is paying $39 a share in cash for the Chicago-based company at an equity value of $9.47 billion, according to an announcement Wednesday, confirming an earlier Bloomberg News report. The deal will be funded through available resources and existing financing capacity, CVS said, and is expected to close this year.

Amid a highly competitive environment for its longstanding pharmacy business, Woonsocket, Rhode Island-based CVS has been expanding into direct patient care via acquisitions, agreeing last year to buy Signify Health Inc., a deal expected to close in the first half of this year. The company has said it wants to make health care more convenient and affordable for consumers and plans to partner with doctors and potentially acquire primary-care practices.

“CVS’s management team now has their work cut out for them, getting two transactions approved by regulators,” said Elizabeth Anderson, an analyst with Evercore ISI. She sees a roughly 80 percent chance the deal will be cleared, according to a note to clients.

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The deal is Chief Executive Officer Karen Lynch’s largest since CVS purchased insurer Aetna for $68 billion in 2018. The company also held talks last year to buy health-care provider Cano Health Inc., Bloomberg News reported.

While unprofitable to this point, Oak Street aims to reinvent care for Medicare patients with low incomes and chronic health problems. The company went public in 2020 and had 169 centers across the US providing care for more than 159,000 patients at the end of last year, according to a company filing.

Shares of Oak Street more than doubled in the past year through Tuesday amid recent reports on negotiations with CVS. The shares rose as much as 33% Monday, giving the company a market value of about $8.2 billion. CVS rose 1.8% before US markets opened Wednesday, while Oak Street gained 3.3%. Cano Health gained 7% in premarket trading.

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Private equity firms General Atlantic and Newlight Partners collectively own roughly 39% of Oak Street, data compiled by Bloomberg shows. Credit Suisse Securities and Lazard Ltd. are serving as co-financial advisers to CVS on the deal. Centerview Partners is advising Oak Street.

CVS’s adjusted earnings were $1.99 a share for the fourth quarter, beating analysts’ average estimate of $1.92, according to a separate statement. Revenue in the period was $83.8 billion, exceeding Street expectations for $76.3 billion.

Adjusted profit for the year will be $8.70 to $8.90 a share, the company said, reaffirming a forecast given last month. In the acquisition announcement, CVS said it is now targeting adjusted earnings per share of about $9 in 2024 and $10 in 2025. Those targets take into account factors such as closing the Oak Street deal, the loss of a pharmacy benefits contract from Centene Corp., lower quality ratings from Medicare that will affect reimbursement and expected contributions from a deal to buy Signify Health.

Despite headwinds including diminished concerns about the pandemic, which has led to fewer visits for Covid-19 tests and vaccinations that bring foot traffic into its stores, CVS’s retail sales beat estimates at $28.2 billion. They were helped by increased prescriptions, front-store volume and a severe cough, cold and flu season.

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Sales in the company’s health-insurance unit of $23.03 billion also came in ahead of Street expectations. The unit’s medical benefit ratio, the percentage of premiums going to patient care, was 86 percent; analysts had estimated 85.02% .

“Last year was defined by outperformance across our foundational businesses, robust cash flow from operations and meaningful progress against our value-based care delivery strategy,” Lynch said in the statement.