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On Monday, Catalyst Health Solutions Inc. was acquired by rival pharmacy benefits management (PBM) company, SXC Health Solutions Corp. . Subsequently, Catalyst Health was de-listed from the New York Stock Exchange, on which it previously traded under the ticker symbol CHSI.

Per the agreement, SXC Health acquired Catalyst Health for $28 per share in cash and 0.6606 shares of SXC Health in exchange of every share of Catalyst Health. Taking into account the closing share price of both the companies on June 29, 2012, the agreement terms translate into a purchase consideration of $4.75 billion. Following the acquisition, the shareholders of SXC Health and Catalyst Health own 65% and 35% of the combined company, respectively.

JP Morgan Chase & Co. (JPM - Analyst Report) financed the cash portion of the purchase consideration for SXC Health. JP Morgan also acted as the company’s financial advisor for the deal along with Barclays Plc (BCS - Snapshot Report), while Goldman Sachs Group Inc. (GS - Analyst Report) and Citigroup Inc. (C - Analyst Report) were the financial advisors for Catalyst Health. Meanwhile, Sidley Austin and Milbank, Tweed, Hadley & McCloy acted as the legal advisors for SXC Health and Catalyst Health, respectively.

The deal is expected to be accretive to SXC Health’s adjusted earnings from 2013. The benefits of economies of scale and improved operating leverage, arising from the takeover, are expected to generate operating cost synergies of $125 million annually for the company in the first 1.5-2 years after the acquisition. Moreover, the deal is expected to drive the company’s annual revenues to $13 billion.

However, SXC Health will have to bear transition costs of $40–$45 million, while amortization costs related to the takeover will amount to $200 million for the first year after the acquisition. Additionally, SXC Health borrowed $1.7 billion to finance the takeover, which increased the company’s annual interest expense to about $70 million.

Nevertheless, the combined company is expected to generate enough cash to repay its debt obligations and invest in various growth initiatives, despite incurring increased expenses.

The acquisition will enhance SXC Health’s operations substantially, thereby making it the fourth largest PBM company after Express Scripts Holding Co. (ESRX - Analyst Report), CVS Caremark Corporation (CVS - Analyst Report) and UnitedHealth Group Inc. (UNH - Analyst Report). The membership base of SXC Health is expected to grow to 25 million following the merger, while the annual prescription volume is expected to surge to over 200 million. The merger will aid both the companies to retain their competitive advantage in the rapidly consolidating PBM industry, which is leading to intense price competition.

The integration of the two companies is expected to be smooth as Catalyst Health already uses SXC Health’s claims processing technology. Moreover, SXC Health shares Catalyst Health’s customer-centered approach as well as commitment to lowering healthcare costs without compromising on the quality.

The clients of Catalyst Health will benefit from the takeover as they will be able to reap the benefits of SXC Health’s expertise in PBM as well as its industry-leading technology. They will also have access to a wider product portfolio. SXC Health’s current headquarters in Lisle, Illionis, will be the headquarters of the merged entity and the company’s current CEO will act as the CEO of the combined entity.

Currently, SXC Health holds a Zacks #3 Rank, implying a short-term Hold rating.

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