CVS Corp., with 195 stores in the Washington area, announced plans yesterday to acquire Revco DS Inc. for $2.8 billion in stock, which would create the nation's second-largest drugstore chain.
If the deal is approved by federal antitrust regulators, the merged company would have annual revenue of $13 billion and 4,000 outlets in 24 states, most of them on the East Coast, in the Midwest and in parts of the Southeast.
Washington area consumers are not expected to notice many changes in CVS stores in the region. CVS became the region's largest drugstore chain behind Rite-Aid when it acquired the former D.C.-based Peoples Drug Stores chain in 1990.
Revco officials said yesterday that they have no stores in the Washington area, but 30 stores spread across the Baltimore market.
The transaction is part of the rush toward consolidation in the retail pharmacy industry, spurred by managed-care insurers seeking deep discounts for drugs and by competition from mail order pharmaceutical sellers and supermarket pharmacies. As pressure on prices has increased, pharmacies have sought to enhance their buying power and reduce overhead expenses by growing larger.
Federal Trade Commission officials would not comment on the deal, but are expected by industry experts to give it close scrutiny. Last April, Rite Aid Corp., the country's largest drugstore chain, withdrew a $1.8 billion offer for Revco after government officials said they planned to file a lawsuit to block the purchase.
Officials at CVS and Revco said they were optimistic about gaining FTC approval because their chains overlap less than Rite Aid and Revco do, giving them less power over pricing.
"We really operate in different markets, there's minimal overlap," said Fred McGrail, a CVS spokesman. "We've worked with the FTC in the past and we'll work with them again and hopefully finalize this deal by midyear."
According to experts in antitrust issues, the FTC will study whether a merged CVS-Revco would have more than 35 percent of the chain drugstore market in a given area or would leave a particular market with just two chains.
"They'll ask the company to divest anywhere in any place with more than 35 percent of the market," said Joe Sims, an antitrust attorney at Jones, Day, Reavis & Pogue in the District.
Experts said regulators will likely be concerned about whether pharmacy benefit management (PBM) companies, which negotiate prescription drug services for enrollees on behalf of insurers, can maintain bargaining leverage if CVS and Revco merge. It's the job of these companies to hold down prescription prices by creating a network of retail outlets in which enrollees can purchase drugs at a discount through their carriers.
"The FTC will worry that after the merger, CVS-Revco could be so big in some markets that pharmacy benefit managers will have no choice but to contract with the combined company," said Steven Sallop, an economics and law professor at Georgetown University Law School. "Today, a lot of PBMs can say, We need CVS or Revco, but not both,' and then play one off the other to keep prices down."
Analysts said they expected the deal to pass muster with regulators because CVS and Revco overlap in few markets.
"There's not nearly the overlap that you saw with the Rite Aid-Revco deal," said Andrew L. Weinberg, an analyst with Raymond James, a brokerage based in St. Petersburg, Fla. "I would expect to see only 100 store closings in the wake of the deal."
Weinberg added that the deal, if approved, could benefit consumers by creating a company with enough buying power to get better prices on non-pharmacy items.
The combined companies would be operated and managed out of the headquarters of CVS -- the name stands for Consumer Value Store -- in Woonsocket, R.I. Revco's headquarters in Twinsburg, Ohio, will be phased out over time, though few layoffs are expected.
Under the terms of the deal, Revco shareholders would exchange each of their shares for CVS stock valued at Thursday's closing price of $40.63 1/2. CVS also would assume about $900 million of Revco debt.
CVS stock closed yesterday at $47.12 1/2, up $3.12 1/2 on the New York Stock Exchange. Revco stock closed at $41, up $3, on the NYSE. CAPTION: COMPANIES IN PROFILE A combined CVS-Revco would have 4,000 drugstores, the most in the United States. CVS/PHARMACY Headquarters: Woonsocket, R.I. (would remain merged company's headquarters) Number of stores: 1,409 in 14 states and D.C. 1996 revenue: $5.5 billion Yesterday's stock close: $47.121/2, + $3.121/2 REVCO Headquarters: Twinsburg, Ohio Number of stores: 2,600 in 17 states 1996 revenue: $5.1 billion Yesterday's stock close: $41, + $3 SOURCES: Associated Press, Bloomberg News