Judge delays Caremark shareholder vote

A Delaware judge ordered Caremark Rx Inc. to delay a shareholder vote on a proposed acquisition by CVS Corp. just hours after the drugstore operator heated up the bidding Tuesday by tripling the special cash dividend it proposes to pay.

Caremark shareholders were initially scheduled to meet Feb. 20, but the vote was delayed until March 9 in an order signed by Chancellor William B. Chandler III.

Chandler is hearing a shareholder lawsuit challenging the Caremark-CVS deal filed by Louisiana Municipal Police Employees' Retirement System. Lawyers for the pension fund asked the judge to postpone the shareholder vote because it needs more time to consider the latest offer from CVS and other recent disclosures by Caremark.

CVS said it would raise the dividend payment to Caremark shareholders from $2 per share to $6 after several shareholders and proxy advisers called the CVS offer too low.

Chandler stated in his order that the "court is not confident that all Caremark shareholders would be able to make an informed decision if they are required to vote on Feb. 20."

CVS, of Woonsocket, R.I., is competing with a hostile offer from pharmacy benefits manager Express Scripts Inc. to buy Caremark, though the Caremark board favors the CVS bid.

The increased dividend will add about $1.7 billion in value to the CVS deal, previously estimated at $24 billion. That brings it roughly into line with the Express Scripts bid worth about $26 billion.

In addition to postponing the shareholder date, Judge Chandler also has set an injunction hearing for Friday, which could possibly halt or delay the CVS deal.

Caremark officials released a news statement following the judge's ruling that said the company will inform shareholders as soon as possible about the new date of the special meeting.

"With the tripling of the special cash dividend to $6 per Caremark share announced earlier today, the CVS merger now offers Caremark shareholders even greater near-term value than it did before, in addition to longer-term strategic benefits and growth opportunities," the statement reads.

Express Scripts said in a released news statement it's pleased with the court order and that it is "time for the Caremark board to engage in a full and fair process to determine what is in the best interests of Caremark stockholders."

Caremark shares rose $1.97, or 3.2 percent, to close at $62.88 on the New York Stock Exchange where CVS shares fell 40 cents, or 1.2 percent, to $32.09. Express Scripts shares rose 68 cents to end at $75.41 on the Nasdaq Stock Market.

The other conditions of the CVS stock bid for Nashville-based Caremark remain unchanged, and the companies reiterated the benefits of the proposed deal, including annual cost savings and cash flow projections.

The CVS offer has already won antitrust approval. But the offer from Express Scripts of Maryland Heights, Mo., has yet to receive antitrust clearance. Express Scripts is the third-largest pharmacy benefits manager and Caremark is No. 2.

"Clearly, the CVS/Caremark merger is superior to the illusory and highly conditional Express Scripts' 'offer' in every conceivable way," said Tom Ryan, chairman, president and CEO of CVS. "Our merger can be closed quickly, delivers real and concrete shareholder value and is based on a compelling strategic rationale."

Judge Chandler also noted in his ruling that shareholders need more time to consider at least two disclosures made by Caremark in a Securities and Exchange Commission filing on Monday.

The company said that over the last few years it has reviewed potential transactions with Express Scripts, with such meetings occurring in 2001, 2003 and most recently in 2005.

The filing also states that any merger would be contingent on protecting the directors and executives from personal liability from investigations into stock option backdating. Caremark is already under investigation for backdating stock options to lows in the company's stock price.

"A reasonable shareholder may consider the revelation that Caremark has considered on at least three separate occasions potential transactions with Express Scripts to be highly relevant," according to the ruling.

Also, shareholders' view on the merger "might be significantly altered by the discovery that, were any merger to be consummated, other plaintiffs presently engaged in derivative litigation against the defendant directors based on backdated option grants might lose standing to assert claims."

Investment advisory firms Glass, Lewis & Co., CtW Investment Group and Institutional Shareholder Services have said that Caremark's board has not succeeded in getting the best deal for its shareholders and urged before the latest dividend increase that Caremark shareholders reject the CVS bid.

Andrew Speller, an analyst with A.G. Edwards & Sons Inc., said CVS is raising its bid to try to persuade the groups to recommend its proposed deal with Caremark. He also expects Express Scripts to raise its bid soon.

"When this thing was first announced, shareholders were only getting around $50 per share. It's come a long way," Speller said. "Right now it seems to be all about the price and the price relative to the risk."

CtW spokesman Michael Garland said on Tuesday the group's position on the Caremark deal for CVS has not changed, despite CVS increasing the cash dividend.

"This increased offer is a desperate move to salvage the deal," Garland said. "Frankly what happened today reinforces shareholder concerns here. It was a terribly flawed process the Caremark board went through that failed to maximize value for Caremark shareholders.

"Caremark would be a ripe product for a private equity firm," he said. "There may be other bidders out there as well."

Institutional Shareholder Services is continuing to recommend a vote against the Caremark and CVS merger, spokeswoman Sarah Cohn said.

Representatives with Glass, Lewis & Co. in San Francisco could not be immediately reached for comment.

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On the Net:

Caremark Rx: http://www.caremark.com

CVS Corp: http//http://www.cvs.com

Express Scripts Inc.: http://www.express-scripts.com