One of the largest pharmacy benefit management companies in North America – Express Scripts Inc. (ESRX) and Morgan Stanley (MS) has planned two accelerated share repurchase transactions for purchasing shares of Express Scripts for a total amount of $1.75 billion.
Under the terms of the agreement, Express Scripts will initially purchase approximately 29.4 million shares of its stock. The shares were purchased from Morgan Stanley under an accelerated share repurchase agreement. The accelerated share repurchase agreement allowed Express Scripts to purchase the shares immediately from Morgan Stanley, with Morgan Stanley purchasing the shares from the open market over the next several months.
After the completion, Express Scripts will either deliver the shares or their cash value to Morgan Stanley, or receive additional shares from Morgan Stanley.
Express Scripts’ decision will depend on the daily volume-weighted average prices per share of the company’s stock during such valuation periods.
The company intends to repurchase shares as a means of returning cash to its shareholders, as well as offsetting dilution from the issuance of shares.
The accelerated share repurchase is usually undertaken by the companies, who have surplus cash and therefore purchase shares of its stock from an investment bank at a fixed cost. The company pays cash to the investment bank and enters a forward contract with it.
The investment bank will then return the shares to the client through purchases in the open market. The shares are often purchased over a period that can range from one day to several months.
The transactions are expected to consummate in the fourth quarter of 2011, but may be accelerated at the option of Morgan Stanley. The shares will be purchased pursuant to Express Scripts’ previously announced share repurchase program.
Express Scripts posted first-quarter 2011 earnings of 66 cents per share (excluding special items), which missed the Zacks Consensus Estimate of 70 cents but were well above the year-ago adjusted earnings of 55 cents per share. Higher earnings came on the back of reduced selling, general and administrative expenses and a lower share count compared with the year-ago quarter.
Further, the company’s acquisition of NextRx pharmacy benefit management business (PBM) from WellPoint Inc. (WLP) for $4.68 billion in 2009, which was a smart strategic move. The aligned business model should provide significant opportunities for driving growth. The deal includes a 10-year agreement under which Express Scripts will provide PBM services, including home delivery and specialty pharmacy services, to members of the affiliated health plans of WellPoint. The dispensing of services to NextRx members should allow Express Scripts to increase generic and mail order penetration, which should help drive earnings.
This reflects the Express Scripts’ strong balance sheet and significant cash flow from operations, which has not only allowed flexibility to opportunistically take advantage of strategic opportunities but also accelerate the share repurchases as well.
EXPRESS SCRIPTS (ESRX): Free Stock Analysis Report
MORGAN STANLEY (MS): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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