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Why Target’s Pharmacies Sale to CVS Is an Industry Game-Changer

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Jul. 13 2015, Published 11:54 a.m. ET

Target sells pharmacy business to CVS Health

On June 15, Target (TGT) and CVS Health (CVS) announced a definitive agreement in which CVS would acquire ~1,660 pharmacies located within the Target stores. The deal value is ~$1.9 billion for the pharmacies, and the transaction will be subject to regulatory review from the Federal Trade Commission.

After the conclusion of the agreement, CVS would operate the pharmacies on a shop-in-shop basis, with the name changed to CVS/pharmacy. As part of the deal, Target’s 80 clinics would also be rebranded as MinuteClinics, adding to the nearly 1,000 clinics already in CVS’ portfolio. Target will continue selling over-the-counter (or OTC) medication.

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Strategic implications

The transaction is strategically important to both companies. For Target, it means divesting a business it considers non-core to its future merchandising decisions.

For CVS, the Target deal brings it more scale, cementing its position as the top retail pharmacy chain in the US and widening its gap with competitor Walgreens Boots Alliance (WBA). CVS has also been aggressively acquiring other businesses. We’ll discuss these aspects in greater detail later in this series.

Market reaction

Financial markets have hailed the deal, with the stock prices of both companies rising for seven consecutive sessions between June 15–June 23. CVS rose 4.6% over this period, while TGT rose by 6.7%. You’ll read more on stock prices, returns, and valuations for food and drug retailers in Part 12 of this series.

Target, WBA, and CVS together constitute 3% of the portfolio holdings in the SPDR S&P Retail ETF (XRT). These three companies are also S&P 500 Index components and are part of the SPDR S&P 500 ETF (SPY). SPY has 9.4% of its holdings invested in the consumer staples (XLP) sector.

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