March 20, 2023

DealBook: Loblaw, Canada’s Largest Grocer, Is Buying Its Biggest Pharmacy Chain

A Shoppers Drug Mart in Ottawa.Chris Wattie/ReutersA Shoppers Drug Mart in Ottawa.

8:39 p.m. | Updated
The Loblaw Companies Limited, Canada’s largest grocer, said on Monday that it would acquire Shoppers Drug Mart, the country’s biggest pharmacy chain, for $11.9 billion in cash and stock.

Loblaw, which is family-owned, is facing several challenges to its core business. Last month, Sobeys, another family-owned grocery store chain, acquired the Canadian stores of Safeway for $5.8 billion in cash. Target is opening its first Canadian stores, many of which include extensive grocery sections. And Wal-Mart Canada has been substantially enlarging food departments at many of its stores.

Loblaw will exchange the equivalent of 33.18 Canadian dollars in cash and 0.5965 of a common share for each Shoppers Drug Mart share. The grocery chain said that the combined value was 61.54 Canadian dollars, or $59.05, a 29.4 percent premium to the average share price of the drug chain over the last 20 days. The deal is the largest transaction between two Canadian companies since 2009, when Suncor Energy bought Petro-Canada for $15 billion.

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Under the current plan, Shoppers Drug Mart shareholders can choose either 61.54 Canadian dollars in cash or 1.29417 Loblaw shares plus one Canadian cent for each of their shares. Shoppers Drug Mart shareholders would own 29 percent of the combined company. In a news conference, Galen G. Weston, the executive chairman of Loblaw, said that while the two companies had spoken informally over the years, he proposed the transaction to Holger Kluge, the chairman of Shoppers, during a meeting “in a minivan on a country road on Thursday morning.” The unusual venue appears to be the result of Mr. Kluge’s attending an out-of-office meeting.

Mr. Weston said repeatedly that the transaction was part of a “vision that combined health, wellness and nutrition” for the company. Loblaw, which has long been associated with high-margin, high-quality house brand merchandise, has been promoting a line of products that it says are more healthful and posting extensive nutritional information in stores. Mr. Weston was vague about how Shoppers’ stores, which feature snack foods and soda as prominently as, say, vitamins, will advance that cause.

Loblaw said it planned to use its distribution network and grocery-buying power to improve the food sections at Shoppers stores, which have been greatly expanded in recent years. Those sections will eventually start carrying Loblaw’s “President’s Choice” house brand line of products as well as more fresh food.

Domenic Pilla, the president and chief executive of Shoppers, will manage the pharmacy as a separate unit that will continue to operate under its own brand names, which include Pharmaprix in Quebec. The combined company would have revenue of 42 billion Canadian dollars.

Loblaw’s executives played down potential antitrust concerns, saying that their company controls about 5 percent of the Canadian pharmacy business while Shoppers holds 25 percent. But David Soberman, a professor of marketing at the Rotman School of Management at the University of Toronto, said there might be problems because the national figures did not reflect the outsize market share of both companies in Ontario, the country’s most populous province.

Galen G. Weston, left, chairman of Loblaw, and Holger Kluge, chairman of Shoppers Drug Mart.Mark Blinch/ReutersGalen G. Weston, left, chairman of Loblaw, and Holger Kluge, chairman of Shoppers Drug Mart.

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MetroPCS Shareholders Approve Merger With T-Mobile USA

The deal, first announced in early October 2012, had looked set for defeat until earlier this month, when Deutsche Telekom gave in to pressure to reduce the combined company’s debt.

Activist shareholder P. Schoenfeld Asset Management had led a proxy battle against the original deal, while biggest MetroPCS shareholder Paulson Co had also threatened to vote against it. Both investors have said they were pleased with the improved terms.

But some shareholders said they were happy to see MetroPCS combine with a larger player, regardless of the details.

“It was significant that they sweetened the offer but I would have voted in favor of the previous terms,” said Robert Capps, a Dallas-area shareholder and telecom executive.

It was not immediately clear what percentage of shareholders voted in favor of the deal. MetroPCS said those figures would be available later Wednesday.

MetroPCS shares fell 11 cents to $11.58 in morning trading.

Shareholders will receive $4.06 per share in cash plus stock equivalent to 26 percent of the combined company in the reverse merger and Deutsche Telekom will own the rest.


MetroPCS, a provider to cost-conscious consumers who pay for calls in advance, and T-Mobile USA are looking to combine their spectrum assets to compete better with bigger rivals.

By tying up with MetroPCS, Deutsche Telekom hopes to provide T-Mobile USA with the spectrum to build a network capable of handling the vast data volumes that U.S. consumers and businesses use on smartphones and tablets.

Some Deutsche Telekom shareholders, however, worry that even a successful merger might not be enough for T-Mobile USA to catch up with rivals.

T-Mobile USA lost 515,000 contract customers in the fourth quarter of 2012, although it recently announced smaller losses of 199,000 contract customers in the first quarter.

The company recently overhauled its price structure to eliminate most phone subsidies, and started selling Apple’s iPhone for the first time. But its network quality lags Verizon and ATT, which have invested massively in fourth-generation mobile technology in recent years.

The United States is key to the investment case for Deutsche Telekom. It earned 26 percent of group revenue there last year and 20 percent of its operating profit.

The German group has long searched for a way to help T-Mobile USA gain critical mass to compete. In 2011, antitrust regulators blocked a $39 billion deal bid for ATT to buy T-Mobile USA.

The merger also paves the way for what some investors and bankers think Deutsche Telekom really wants – to ultimately reduce its exposure to a highly competitive market.

For now, Deutsche Telekom has committed to holding its shares in the new combined entity for 18 months.

(Additional reporting by Sinead Carew in New York, Harro ten Wolde in Frankfurt and Leila Abboud in Paris; Editing by Gerald E. McCormick and Bernadette Baum)

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Deal Professor: Why MetroPCS Is Truly in Play

A MetroPCS store in Manhattan.Mary Altaffer/Associated PressA MetroPCS store in Manhattan.

There are three fundamental things to know about the deal between MetroPCS and T-Mobile USA.

First, this is really just an acquisition of MetroPCS by Deutsche Telekom. After the transaction is completed, Deutsche Telekom, the German telecommunications behemoth, will own 74 percent of the combined company, which will be renamed T-Mobile. MetroPCS’s public shareholders will own the rest.

Second, though Deutsche Telekom is acquiring MetroPCS, this is also a way for Deutsche Telekom to undertake a reverse initial public offering for T-Mobile. Deutsche Telekom may be acquiring control of the combined MetroPCS and T-Mobile, but it wants to exit this business eventually. If the transaction goes through, expect Deutsche Telekom to sell those shares to the public over time.

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Third, because this is really an acquisition, it puts MetroPCS, one of the few national mobile carriers, very much in play.

The deal structure is not that of a typical merger where a buyer simply acquires the target. It is instead a recapitalization. A recapitalization is a fancy term that means the rejiggering of a company’s capital structure.

The restructuring part is Deutsche Telekom’s contribution of the T-Mobile business to MetroPCS in exchange for 74 percent of the share capital of the combined business. And because this is categorized as a recapitalization, the contribution of the shares is tax free to Deutsche Telekom.

T-Mobile's deal to buy MetroPCS turns up the pressure on Sprint Nextel.Stephan Savoia/Associated PressT-Mobile’s deal to buy MetroPCS turns up the pressure on Sprint Nextel.

The net effect is that Deutsche Telekom is acquiring control of MetroPCS.

But don’t expect Deutsche Telekom to hold on to the shares for long. As Rene Obermann, the company’s chief executive, acknowledged on an investor call, this is also a way for Deutsche Telekom to gain liquidity for its T-Mobile interest. Mr. Obermann called the transaction a “turbo I.P.O.” By doing it this way, Deutsche Telekom saves on I.P.O. costs, and also has an asset that is more easy to sell since it has greater scale.

There are also some bells and whistles on the transaction. There is a $1.5 billion dividend to MetroPCS shareholders to give them an incentive to vote for the share issuance to T-Mobile. There is also a 2-for-1 reverse stock split of MetroPCS shares. The parties didn’t disclose why, but the reverse stock split is likely to push the MetroPCS stock price back above $10 after the large dividend and keep up appearances. The stock split also has the convenience of ensuring that MetroPCS has enough authorized shares to issue to Deutsche Telekom.

MetroPCS will also restructure its debt, and Deutsche Telekom has committed to lending the new entity as much as $6 billion more in financing on top of the $15 billion the combined entity will owe Deutsche Telekom.

But it is the structure of the transaction that puts MetroPCS up for sale.

Under Delaware law, the deal is viewed as a sale because Deutsche Telekom is obtaining majority control of MetroPCS. This puts the MetroPCS board into “Revlon-land” (referring to a 1985 Delaware decision in a takeover battle over Revlon), requiring the board to obtain the highest price reasonably available for the sale of the company.

This is an open invitation for another bidder to come in and pay a higher amount, something the MetroPCS board must accept if it a clearly superior offer.

Deutsche Telekom’s main fear here is likely to be a move by Sprint. Earlier this year, MetroPCS had previously thought it had a deal with Sprint, but the Sprint board pulled out at the last minute.

MetroPCS is reported to be — surprise! — not unhappy that this new deal may spur Sprint to come to the table. And because Revlon duties apply, MetroPCS’s board is now bound to take the highest price reasonably available. If MetroPCS takes this offer, it must pay a $150 million termination fee to Deutsche Telekom.

Notably, Deutsche Telekom tried to deal with this issue by putting a “force the vote” provision in the transaction agreement. MetroPCS cannot terminate this deal even if a competing bid is made unless the company holds its shareholder vote and shareholders vote no. Before then, only Deutsche Telekom can terminate the deal even if MetroPCS’s board recommends a competing bid. And Deutsche Telekom will have five business days to match any competing bid before MetroPCS’s board can even make such recommendation change.

This will not deter a Sprint bid, but it will make it harder to complete and give Deutsche Telekom more time to respond to any competing bid.

Ultimately, the structure of the transaction was likely driven by the fact that Deutsche Telekom wanted liquidity but MetroPCS could not pay the cash necessary to acquire T-Mobile. The contribution is therefore a stepping stone to such liquidity, but Deutshe Telekom is now forced to accept this risk of a competing bid.

The next move is up to Sprint.

Either way, the real winners may be Deutsche Telekom’s lawyers and investment bankers. Their fees are likely to come out of the $3 billion in cash that ATT paid to Deutsche Telekom in connection with ATT’s thwarted attempt to purchase T-Mobile. And if this transaction also fails, these lawyers and bankers are also likely to be paid some part of their fees, leaving them teed up to take a run at a third transaction.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.

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DealBook: Glencore’s Bid to Buy Xstrata Is Increased at the 11th Hour

LONDON — Glencore, the world’s largest commodities trader, saved its megamerger with Xstrata from collapse on Friday by sweetening its offer for the large multinational mining company. But the deal still remains in limbo after Xstrata raised concerns about the revised proposal.

Under the new terms, Glencore is offering 3.05 of its shares for every Xstrata share, valuing the combined company at $90 billion. The commodities trader had initially agreed to exchange 2.8 shares.

Glencore is trying to win over investors as it aims to gain size and scale in an industry increasingly under financial pressure.

Prices of natural resources have plummeted over worries that demand from important customers in the emerging markets might be faltering. The situation has weighed on the profits and share prices of major players like Glencore and Xstrata. Earnings at Xstrata dropped by 33 percent in the first half of the year.

By teaming up, the two companies would significantly increase the size of their balance sheet, giving them additional firepower to make deals and invest in new projects. They could also use the merger to cut costs and better weather the market volatility.

But Qatar Holding, the sovereign wealth fund of the Persian Gulf nation and Xstrata’s second-largest shareholder, had threatened to derail Glencore’s effort. For months, the emirate said it would vote against the deal unless Glencore improved the terms. Investors were set to vote on the deal Friday morning.

While Glencore appears to be moving toward compromise, it is not clear whether the proposed terms will appease Xstrata shareholders. Qatar has not publicly weighed in on the deal, and the board of Xstrata has indicated the new price might still be too low. On Friday, the mining company said Glencore’s proposal “lacks sufficient information on key elements.”

The stage is now set for a round of fractious negotiations that could last for weeks. While increasing the price, Glencore also added conditions to the deal, which may not sit well with Xstrata shareholders.

Under the proposal, Ivan Glasenberg, Glencore’s chief executive, would lead the merged company. Previously, Mick Davis, the head of Xstrata, was set to take over as chief executive. Qatar has been supportive of Mr. Davis and his management team.

Glencore also wants the option to restructure the deal as a takeover, rather than a merger. By doing so, the company would need only 50 percent of Xstrata investors to agree. Glencore, which already owns 34 percent of Xstrata, would also be able to vote its shares in a takeover. Such a move would greatly dilute Qatar’s sway.

“This is now a lot cleaner deal,” said Michael Rawlinson, head of natural resources at Liberum Capital in London. “It’s more of a takeover with Ivan as C.E.O.”

While Qatar gave no public indication of its support or opposition, Xstrata warned shareholders about the potential problems with the deal. The company highlighted the “significant risk” if Mr. Davis and his lieutenants did not lead Glencore-Xstrata.

Xstrata also said the new ratio offered a premium that was “significantly lower than would be expected in a takeover.” Xstrata said the bid represented a 22.2 percent premium to its closing price on Thursday. In 35 proposed mining deals over the eight years to 2011, the average premium paid was 31 percent, according an HSBC report published in February.

“It’s interesting that they recommended a deal at 2.8 and now say that 3.05 is not high enough,” said Andrew Keen, mining analyst at HSBC. “Xstrata looks like they’re mounting a defense.”

Xstrata’s stance gained support. On Friday, Knight Vinke, the American activist investor, said it “welcomed the Xstrata board’s belated willingness to represent the interests of minority investors.” Knight Vinke sided with Qatar in July, after the emirate demanded Glencore improve the merger ratio to 3.25 to 1.

Richard Buxton, a fund manager at Schroders, told reporters, “We were prepared to accept 3.25, and we hope the Qataris stick to that number.” Schroders owns nearly 1 percent of Xstrata.

Other shareholders welcomed Glencore’s offer. “We are supportive of the improved terms and the changes to the executive governance arrangements,” said David Cumming, head of equities at Standard Life Investments, a fund manager that owns 1.4 percent of Xstrata and 0.8 percent of Glencore. Previously, Mr. Cumming had criticized the deal, calling the earlier offer inadequate.

Xstrata and Glencore representatives did not say when a new shareholder vote would take place. Glencore must first present a firm offer.

The revised deal represents an about-face for a chief executive who has gained a reputation as one of the toughest negotiators in the commodities business. For months, Glencore seemed unwilling to budge on its initial bid. Last month, Mr. Glasenberg said that it would be “no big deal” if the merger failed and suggested privately that Glencore could make a new offer for Xstrata next year.

The new proposal came together at the last minute. After fast-and-furious discussions, Mr. Glasenberg approached Qatar with the deal late Thursday, according to a banker to one of the two companies, who spoke on the condition of anonymity.

As Glencore shareholders gathered Friday morning in Zug, Switzerland, to vote, Simon Murray, the company’s chairman, adjourned the meeting, citing developments that had “happened very recently overnight.” After the proposal was unveiled publicly, Xstrata adjourned its own shareholder meeting. A few hours later, Xstrata released its critique of the outlined terms.

Glencore’s package of new proposals is “all about face-saving,” the banker said. A higher offer “was always there as a possibility.”

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DealBook: Glencore Increases Offer in Bid to Secure Xstrata Deal

12:32 p.m. | Updated 9:28 a.m. | Updated

LONDON — Glencore International, the world’s biggest commodities trader, sweetened its offer for Xstrata in a last-minute bid to save the mega-merger with the large mining company.

The commodities trader is trying to win over investors. In recent months, the second-largest Xstrata shareholder, Qatar Holding, the sovereign wealth fund of the Persian Gulf nation, threatened to block the deal unless Glencore raised its bid.

Under a new proposal, Glencore offered 3.05 of its shares for every Xstrata share, valuing the combined company at $90 billion. The commodities trader had initially agreed to exchange 2.8 shares. For months, Qatar Holding, which owns 12 percent of Xstrata, had held out for a ratio closer to 3.25.

While upping the price, Glencore also added conditions to the deal. Under the new proposal, Ivan Glasenberg, Glencore’s chief executive, would lead the merged company. Previously, Mick Davis, the head of Xstrata, was set to take over as chief executive.

Glencore also wants the option to restructure the deal as a takeover, rather than a merger. By doing so, the company would only need 50 percent of Xstrata investors to approve the deal. Glencore, which owns roughly 34 percent of Xstrata, could also vote its shares. As a merger, Glencore would need 75 percent of the shares and would have to sit out the vote, making it more difficult to get approval.

“This is now a lot cleaner deal,” said Michael Rawlinson, head of natural resources at Liberum Capital in London. “It’s more of a takeover with Ivan as C.E.O.”

Glencore shares fell 4 percent in midday trading in London, while stock in Xstrata rose 7.7 percent on Friday.

But it’s not clear whether the new terms will appease Xstrata shareholders.

On Friday afternoon, Xstrata said it was awaiting more details, saying the new Glencore proposal “lacks sufficient information on key elements.” The mining company raised some initial objections, saying the new ratio of 3.05 Glencore shares for each Xstrata share implied a premium that “is significantly lower than would be expected in a takeover.”

Xstrata said the ratio of 3.05-to-1 would constitute a 22.2 percent premium to its closing price on Thursday. In 35 proposed mining deals over the eight years to 2011, the weighted average premium paid was 31 percent, according an HSBC report published in February.

Xstrata also highlighted the “significant risk” of Mr. Davis and his management team leaving the new company. Glencore-Xstrata would derive most of its earnings from mining, but it would now potentially be run by Glencore executives, who have been focused on commodities trading.

An Xstrata representative did not specify the date of a new shareholder vote on the deal.

The two sides have been at a stand-off for months.

After going public last year, Glencore moved quickly to strike a deal with Xstrata. The merger seemed natural because the two companies have been deeply intertwined for years.

But Xstrata shareholders balked at the price, with Qatar leading the push. After a multibillion-dollar spending spree, the sovereign wealth fund increased its stake in Xstrata to 12 percent, gaining more sway in the fight.

Glencore seemed unwilling to budge. Last month, Mr. Glasenberg said that it would be “no big deal” if the merger failed. He had held firm in public that no change of terms would be forthcoming and suggested that Glencore could make a new offer for Xstrata next year.

As the fight dragged on, the broader commodities business started to falter. Metal prices have fallen sharply this year, hurting Xstrata’s earnings, which fell 33 percent in the first six months of the year.

The new proposal came together at the 11th hour.

Mr. Glasenberg made the new offer to Qatar around 9 p.m. London time on Thursday, according to a banker to one of the two companies, who spoke on the condition of anonymity because he was not authorized to speak publicly.

“This is all about face-saving,” the banker said. A higher offer “was always there as a possibility,” he added. But Qatar and Glencore’s hardening public opposition had blocked all lines of communication and potential compromise.

Simon Murray, Glencore’s chairman, adjourned the Glencore shareholder meeting shortly before it was due to begin on Friday morning in Zug, Switzerland. Developments “happened very recently overnight,” Mr. Murray told shareholders who had gathered for the vote.

While Qatar won improved terms, it may have to compromise on the issue of executive management. Qatar spent $5 billion buying Xstrata shares in part because of its confidence in Mr. Davis and his team.

“We are supportive of the improved terms and the changes to the executive governance arrangements,” said David Cummings, head of equities at Standard Life Investments, a fund manager that owns 1.4 percent of Xstrata and 0.8 percent of Glencore. “The deal will, we believe, enhance the growth prospects of the combined group.” Previously, Mr. Cummings had criticized the deal, calling the earlier offer “inadequate.”

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DealBook: Berkshire Unit Bids $3.25 Billion for Transatlantic

4:44 p.m. | Updated with statements from Validus and Allied

A division of Warren E. Buffett’s Berkshire Hathaway waded into the fight for Transatlantic Holdings, bidding $3.25 billion in an attempt to top competing offers from two other insurers.

Berkshire’s National Indemnity is offering $52 a share, Transatlantic confirmed in a statement on Sunday. That is a nearly 15 percent premium to Transatlantic’s Friday closing price.

“With your stock trading at $45.83, I have to believe that you will find our offer to buy all of Transatlantic shares outstanding at $52.00 per share to be an attractive offer,” Ajit Jain, the head of Berkshire’s sprawling reinsurance operations, wrote in a letter to Transatlantic’s chief executive, Robert Orlich, on Friday.

Berkshire’s bid is also well above the current values of the two outstanding offers for Transatlantic. The stock-and-cash bid by Validus Holdings was worth about $2.9 billion as of Friday’s close. The bid was worth nearly $3.5 billion when it was first announced.

An all-stock merger with Allied World Assurance, which Transatlantic had already agreed to, was worth about $2.76 billion. It was originally worth about $3.2 billion.

The brief letter from Mr. Jain gave few details about Berkshire’s proposal, other than a $75 million breakup fee payable to National Indemnity if the two strike an agreement but do not close a deal before Dec. 31. Mr. Jain added that he expected to hear a response by the close of business on Monday.

Berkshire did not specify what form its offer would take. But in keeping with the insurance conglomerate’s proclivities, it would likely be an all-cash offer.

Even at $3.2 billion, Berkshire’s offer is well below Transatlantic’s book value of $4.2 billion. And if it is all-cash, it would offer Transatlantic shareholders no upside if the combined company improves financially.

Transatlantic said in its statement that its board will “carefully consider and evaluate the proposal” from Berkshire. But it is unclear whether, with two offers already on the table, the Transatlantic board can reach a decision on the latest offer by Berkshire’s deadline.

Should Transatlantic agree to a deal with Berkshire, it would be liable for a $115 million breakup fee payable to Allied.

Validus has already taken its bid directly to Transatlantic’s shareholders, hoping to persuade them with both a higher price and the promise that it will create a well-balanced company with a big presence in reinsurance.

That prompted strong opposition from Transatlantic, which rejected the bid and filed a lawsuit against Validus, arguing that the unwanted bidder made misleading statements about its offer to shareholders.

Validus’s chief executive, Edward J. Noonan, has promised to wage a lengthy fight for Transatlantic.

Meanwhile, Allied — which made the first bid for Transatlantic — is arguing that its merger proposal would create a diversified operation, including a specialty insurance business.

So far, shareholders of both Validus and Allied appear unimpressed with either company’s campaign for Transatlantic. Shares in Allied have tumbled more than 13 percent since the insurer unveiled its merger proposal in June, while those in Validus have fallen 11 percent since making its hostile bid last month.

In a statement on Sunday, Validus again urged Transatlantic to hold merger talks without what it called restrictive conditions, including a limit on stock ownership.

Allied said in a statement that it remained committed to its merger with Transatlantic and derided the Berkshire offer as “opportunistic.”

Berkshire’s bid follows the company’s rosy earnings report on Friday, in which it disclosed $3.42 billion in profit for the second quarter this year, topping analyst predictions. Earlier this week, Allied announced that it earned $93.8 million in its second quarter, beating analyst estimates. Two weeks ago, Validus reported $109.9 million in net income for the quarter, matching analyst expectations.

Transatlantic is being advised by Goldman Sachs, Moelis Company and the law firm Gibson, Dunn Crutcher.

Allied is being advised by Deutsche Bank and the law firms Willkie Farr Gallagher and Baker McKenzie. Validus is being advised by Greenhill Company, JPMorgan Chase and the law firm Skadden, Arps, Slate, Meagher Flom.

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DealBook: Antitrust Hurdles Seen for Merger of Drug Benefit Managers

David Snow, left, chief executive of Medco Health Solutions, and George Paz, chief executive of Express Scripts, after they announced their merger.Karen Elshout Photography/Express Scripts, via Associated PressDavid Snow, left, chief executive of Medco Health Solutions, and George Paz, chief executive of Express Scripts.

Two of the nation’s largest pharmacy benefit managers, Express Scripts and Medco Health Solutions, said on Thursday that they wanted to combine forces in a $29.1 billion merger that would account for about four of every 10 prescription claims in the country.

If federal regulators and the companies’ shareholders approve the deal, the merger would create a company with more than $100 billion in annual revenue. Analysts say the deal could fundamentally change the dynamics of the market for overseeing prescription drug use for health plans and employers, but they predicted that the merger would face the thorny issues of antitrust that have swirled around other ventures involving pharmacy benefit managers.

In announcing the proposed deal, the companies emphasized what they said would be significant savings in drug costs. “The cost and quality of health care is a great concern to all Americans,” said George Paz, chairman and chief executive of Express Scripts, in the company’s release. “This is the right deal at the right time for the right reasons.”

Under the proposed agreement, Express Scripts will own 59 percent of the new company, and Mr. Paz will retain both his titles.

While he played down the advantages the combined company would have because of its size, Mr. Paz said the two companies offered complementary approaches to managing patients’ drug benefits.

Express Scripts has specialized in understanding patients’ behavior and why they may not take their medicines, while Medco has emphasized clinical expertise to determine which medicines work best. “We’re going to take a lot of costs out of health care,” Mr. Paz said in a telephone interview.

But analysts, who expressed surprise at the deal, predicted strong opposition to the merger, which would leave the industry with just one other independent company, CVS Caremark, itself the product of a $27 billion merger four years ago. “I think it’s going to be a very tough fight through the Federal Trade Commission,” said Adam J. Fein, an industry consultant in Philadelphia.

While about 60 companies now compete, he estimates that the combined company might have had 40 percent of the market last year, compared to about 16 percent for CVS Caremark. He said both pharmacists and drug makers were likely to try to block the deal.

“I think this poses very serious antitrust concerns,” said David Balto, an antitrust lawyer who used to work for the F.T.C. and now represents community pharmacists. Consumer groups have already raised concerns with the commission over whether CVS Caremark, the result of a merger between a large drug store chain and a pharmacy benefit manager, is hurting competition, and regulators are likely to want to prevent the merger if they have similar worries that it will stifle competition, he said.

Regulators are likely to scrutinize the merger for any harmful impact on consumers, said Ankur Kapoor, a partner at the law firm Constantine Cannon who specializes in antitrust matters. “Three-to-two mergers have historically been quashed by the antitrust agencies.”

But the companies may be able to persuade regulators that the merger will eventually save people money. “The timing of this deal is strategic,” he said, given the professed efforts of the Obama administration and others to try to control health care costs.

Analysts and industry experts said the combined company would have more clout with drug makers, making it easier to demand lower prices both for generic and brand-name drugs. “The question is, Will they pass it on to the buyer or will they keep it for earnings?” asked Edward A. Kaplan, a benefits consultant with the Segal Company. While two of the smaller benefit managers, UnitedHealth’s OptumRX unit and Catalyst Health Solutions, have recently won some contracts, employers and health plans have largely selected one of the three major companies to handle their prescription drug coverage, he said.

The merger could also have an impact on the recent battles with large drug store chains like Walgreens. Last year, Walgreens threatened to stop filling prescriptions for patients in plans offered by CVS Caremark. Walgreens is now in a similar standoff with Express Scripts.

“If this deal were to go through, it’s going to raise the stakes for Walgreens,” said B. Kemp Dolliver, who follows the industry for Avondale Partners in Boston. Mr. Dolliver predicts the parties will settle their differences, because an agreement would be in the interest of both the drug plan and the drug store chain. Walgreens did not return calls seeking comment.

Despite the doubts raised over whether the deal would get the necessary approvals, Mr. Paz emphasized that the two companies were confident they could overcome the necessary regulatory hurdles. “We wouldn’t be doing this if we didn’t think we could get it through,” he said.

While analysts said both companies had been looking for possible acquisitions, they said they had been expecting much smaller deals. But the two companies had informally discussed a potential merger for years, according to people briefed on the matter. Medco finally reached out to Express Scripts about a sale several weeks ago, and the two companies quickly put together the transaction without a heavy amount of due diligence, these people added.

While the agreement does not include a termination fee if regulators block the deal, it does specify that Express Scripts will sell up to a certain amount of assets to help gain approval, they said. The lack of a breakup fee is also meant to reflect anticipation that the merger will pass regulatory scrutiny.

Analysts say Medco executives were under pressure to combine after a series of competitive defeats. Earlier this year, Medco announced it had lost the 2012 contract with the Federal Employees Health Benefits Program, worth $3 billion in annual revenue, to CVS Caremark, after also losing the account with the California Public Employees’ Retirement System.

On Thursday, Medco also announced the end of its contract with UnitedHealth, which now plans to manage its drug benefits internally and may prove to be a formidable competitor.

“All of those situations this year sealed their fate,” said Roy Wilkinson, an industry consultant in Baltimore.

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DealBook: Express Scripts to Buy Medco for $29 Billion

George Paz, the chief executive of Express Scripts.George Paz, the chief executive of Express Scripts.

6:36 a.m. | Updated

Express Scripts said on Thursday that it would buy smaller rival Medco Health Solutions for $29.1 billion, becoming the biggest pharmacy benefits manager in the country in one of the largest deals of the year.

Under the terms of the deal, Express Scripts will pay $28.80 in cash and .81 of its own shares for each Medco share. As of Thursday morning, that is valued at $71.36, a 28 percent premium above Medco’s Wednesday closing price.

After the deal closes, Express Scripts will own 59 percent of the combined company. George Paz, Express Scripts’ chairman and chief executive, will continue to hold those titles. The new company’s board will be expanded to include two current Medco independent directors.

The merger is only the latest for the health care industry, which has hosted significant consolidation amid the coming overhaul in insurance.

Deutsche Bank analysts called the deal a “highly unexpected marriage of two fierce competitors” that highlighted how much the industry was changing. The analysts, led by Ross Muken, wrote that the transaction “should also help to quell some fears over the sustainability of long-term profit growth.”

Companies like Express Scripts and Medco help employers, health plans, labor unions and government agencies fulfill benefits for prescription drugs, reduce the costs of treatments by negotiating discounts from drug makers, while often running mail-order pharmacies as well.

“The cost and quality of health care is a great concern to all Americans,” said George Paz, head of Express Scripts. “This is the right deal at the right time for the right reasons.”

In Medco, Express Scripts finally has its big drug benefits merger. The company unsuccessfully battled CVS for CareMark Rx and definitively lost four years ago, stymied in part because of antitrust concerns. This time around, Express Scripts stressed that despite buying Medco, it would still face competition from a variety of drug benefits managers.

“On the regulatory front, we expect a drawn out process,” Steven Halper, an analyst at Stifel Nicolaus, wrote in the research note on Thursday. “Five years ago, Express was very confident that it would get regulatory approval for its attempted purchase of Caremark.”

Mr. Muken, of Deutsche Bank, agreed: “Under the Obama administration, the F.T.C. has been significantly more strict” in the deals is approves and rejects, he said in an interview.

“There’s going to be a pretty heavy lobby from the pharma community” against the deal, he said, because Express and Medco were creating “an entity with a lot of power in the supply chain.”

Still, the Deutsche analysts are predicting that the acquisition will complete late in the first half of next year.

Medco, one of the largest pharmacy benefits manager in the country, said in May that it had lost the 2012 contract with the Federal Employees Health Benefits Program to CVS Caremark, a contract that accounted for about $3 billion in yearly revenue. Last month it lost the account of the California Public Employees’ Retirement System to CVS as well. Medco’s stock is down 8.96 percent for the year.

Express Scripts said that it expects to reap about $1 billion of cost savings once the deal is completed, and that it will begin adding to its earnings per share in the first full year after closing.

The merger is expected to close in the first half of next year, pending regulatory and shareholder approval.

Express Scripts was advised by Credit Suisse, Citigroup and the law firm Skadden, Arps, Slate, Meagher Flom. Medco was advised by JPMorgan Chase, Lazard and the law firms Sullivan Cromwell and Dechert.

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The Media Equation: Ugly Details in Selling Newspapers

James O’Shea, the former editor in chief of The Los Angeles Times, found a classic of the genre in the course of reporting out “The Deal From Hell: How Moguls and Wall Street Plundered Great American Newspapers,” his deep dive into the two deals that tipped over the companies that owned, among many other newspapers, The Los Angeles Times and The Chicago Tribune.

Here’s the capsule version: in 2000, The Tribune Company, owner of the Tribune and many other papers, bought the Times-Mirror Company, owner of The Los Angeles Times, for a then-record $8.3 billion. The merger never yielded much in the way of synergy, and the combined company put itself in play in 2007, when there were few buyers left.

Enter Sam Zell, a real estate tycoon with a fondness for distressed assets, who took over the business with the help of an Employee Stock Purchase Plan that saddled Tribune with $13 billion in debt. The company is now mired in a two-year, hugely expensive bankruptcy.

That’s all known. What Mr. O’Shea focused on was how the bankers — who he said should have known the deal would render the company insolvent — seemed to be too busy counting their fees to care. Here’s a note he found buried deep in court records from Jieun Choi, an analyst at JPMorgan Chase Company, that demonstrated a breathtaking level of cynicism and self-dealing:

“There is wide speculation that [Tribune] might have so much debt that all of its assets aren’t gonna cover the debt in case of (knock-knock) you know what,” she wrote to a colleague, in a not very veiled reference to bankruptcy. “Well that’s what we are saying, too. But we’re doing this ‘cause it’s enough to cover our bank debt. So, lesson learned from this deal: our (here I mean JPM’s) business strategy for TRB but probably not only limited to TRB is ‘hit and run.’ ”

She then went on to explain just how far a bank will go to “suck $$$ out of the (dying or dead?) client’s pocket” in terms that are too graphic to be repeated here or most anywhere else.

The court-appointed bankruptcy examiner, Kenneth Klee, was skeptical of her ability to make such a judgment, saying “Choi’s e-mail reflects a misunderstanding by a junior analyst who failed to understand the nature and purpose of the analysis she was asked to perform.” Mr. Klee sought to interview her, but she declined and has since returned to her native Korea. Mr. O’Shea said her e-mail reflected an overall mentality that was pervasive among the banks.

JPMorgan ran the deal, but other banks, including Citibank and Bank of America took part. There were two separate rounds of funding to raise the approximately $12 billion that Mr. Zell borrowed to take the Tribune Company private. The banks received an eye-popping $161 million in fees for just the first round — a number sufficient to run The Los Angeles Times newsroom for a year, as Mr. O’Shea points out — and a total of $283 million in fees for both rounds.

He also reports that Jamie Dimon, the head of JPMorgan expressed some doubts about the fundamentals of the deal based on his firm’s analysis, but ultimately the bank decided to keep Mr. Zell’s business. JP Morgan was a substantial lender in the deal as well, lending hundreds of millions of dollars, and will share in the pain of the bankruptcy.

JPMorgan’s lawyers declined to comment, but the bank has said in the past that both it and Mr. Dimon were obligated by contracts signed during phase one of the lending, and that they did so based on a solvency opinion that later came into dispute.

Mr. O’Shea said in a phone call that he “was stunned by how this small group of powerful bankers, all of whom seemed to know each other, lined up to get Mr. Zell’s business. Like him, they didn’t know much about the news business, but they were basically doing billion dollar loans with a wink and nod.”


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DealBook: Utilities Turn to Mergers as Demand for Power Slows

A Progress Energy nuclear plant in New Hill, N.C.  The utility’s merger with Duke Energy is pending.Jim R. Bounds/Bloomberg NewsA Progress Energy nuclear plant in New Hill, N.C. The utility’s merger with Duke Energy is pending.

Even as the number of tablet computers, electric vehicles and Internet data centers multiply rapidly, electricity demand is barely growing. Low-power processors, smarter manufacturing plants, rooftop solar panels and other technologies are keeping a lid on electricity use.

The slowdown is spurring a fresh cycle of deal-making among publicly traded utilities. Not unlike the wave of consolidation that came after deregulation in the 1990s, major electricity players are looking to get bigger to protect their bottom lines.

So far this year, utilities in the United States have announced mergers and acquisitions with a total value of $44 billion. That compares with $30 billion in all of 2010, according to Thomson Reuters.

If approved, Duke’s Energy’s $26 billion deal in January to buy Progress Energy would create the country’s largest utility. The combined company would own power plants with 57 gigawatts of capacity, generate $22.7 billion in revenue and serve 7.1 million customers across six states.

The surge of deals “marks the acceleration of a long-awaited consolidation of the U.S. electric utility industry,” said Todd A. Shipman, credit analyst of utilities and infrastructure ratings at Standard Poor’s.

By his take, today’s deal-making will pick up from the previous era of consolidation. Since deregulation, the industry has shrunk to roughly 50 publicly traded companies, from 100. That number could be halved to 25 in as little as five years, Mr. Shipman said.

While the usual financial pressures to fortify balance sheets and improve credit quality are once again pushing mergers and acquisitions, environmental dynamics are playing a bigger role than in the past. Utilities — facing pending regulation on greenhouse gas emissions and renewed enforcement of older rules on air pollution — must reckon with the rising costs of compliance.

The added expenses come just as growth in electricity demand is being crimped by efficiency gains. Electricity usage increased 0.5 percent a year on average for the decade that ended 2010, down from 2.4 percent a year during the 1990s, according to the Energy Information Administration.

The anemic figures represent the tail end of a six-decade deceleration of electricity demand. The rate peaked in the 1950s, at 9.8 percent a year, during a period of supercharged industrial growth and home construction.

Customers’ plans reflect a secular shift. Nine out of 10 businesses and 70 percent of consumers have set specific goals to lower their electricity costs, according to a recent study by the Deloitte Center for Energy Solutions with the Harrison Group, a research services firm. Nearly a third of companies polled have goals to self-generate electricity, whether through solar panels, reuse of wasted heat or other methods.

Utilities are adjusting to the new reality. With customers tapering their electricity use, Consolidated Edison is deferring the installation of transformers and other costly capital equipment in New York, said Rebecca Craft, the company’s director of energy efficiency and demand management. Con Ed trimmed its outlook for how much the city’s appetite for power will grow in the coming decade to 1 percent a year, from 1.7 percent.

“Practically every utility today is thinking about flattened growth of demand for energy,” said Gregory E. Aliff, a vice chairman of energy and resources at Deloitte.

“In the last wave of utility mergers, it was more offensive — companies were seeking growth,” he said. “Today is different: the industry is more on the defensive. Companies face a question of how to grow, and consolidation is a way to grow earnings.”

New environmental regulations are only heightening the growth challenge. The industry faces potentially sizable bills to meet a raft of air pollution rules being pushed by the White House.

Utilities with a big reliance on coal face the steepest emissions penalties. American Electric Power, which derives about 85 percent of its power from coal, recently estimated the new rules could cost $6 billion to $8 billion in coming years. The money would pay for adding filters to power plant smokestacks, closing coal-fired generators and switching to lower-emission natural gas generators.

Some merger-minded utilities are shedding assets to lower their exposure to such rules. As part of its $7.9 billion deal to buy Constellation Energy, Exelon plans to sell a batch of coal-fired plants. While coal fuels 12 percent of their current generation, the companies aim to halve that share after the merger.

A.E.P., Duke and Exelon declined to comment.

Unlike in previous periods of consolidation, regulators seem more willing to approve deals, given the sluggish economy and job market. Previously, the process could drag on for years, but recent mergers have been moving along more quickly.

This month Connecticut regulators effectively approved Northeast Utilities’ tie-up with NStar, despite opposition from the state’s attorney general. When the $6.9 billion deal including debt was announced last October, the companies pledged that “no broad-based, corporatewide layoffs or early retirements are planned.”

Said Mr. Shipman of S.P., “In most of these deals, executives have been careful to emphasize that jobs will be spared, rather than cut.”

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