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CVS to acquire Target’s pharmacy business for $1.9 billion

A CVS store in Philadelphia. (AP Photo/Matt Rourke, File)

CVS Health announced Monday that it has signed an agreement to buy Target’s pharmacy business for $1.9 billion, a move that allows the drugstore chain to expand into new geographic markets and gives Target more room to focus on turning around its core business.

Under the terms of the deal, CVS Health would operate the 1,660 pharmacies that are housed in Target’s big-box stores and re-brand them as CVS/pharmacy. CVS would also take over Target’s 80 in-store health clinics.

CVS executives said the deal would allow them to reach a broader base of customers. They will enter metropolitan areas where they don’t currently have a strong presence, such as Seattle, Portland and Denver, and perhaps capture a different kind of shopper: While CVS’s 7,800 drugstores are often a destination for a “fill-in trip,” in which you grab two or three items, Target’s massive merchandise assortment makes it a logical destination for a bigger shopping trip.

“This partnership allows us to help those customers who may define convenience as a one-stop shop, or who may define convenience in a more episodic fashion,” said Larry Merlo, CVS’s chief executive, on a conference call with investors.

Target executives said Monday that while their pharmacy business drives traffic to their stores, its profitability last year was “modestly negative.” Chief executive Brian Cornell said that Target’s pharmacy business hasn’t boomed because of the retailer’s lack of scale and expertise in that area.

Cornell told investors Monday morning that pharmacy is “a very complex space in which we’re not positioned to be successful on our own.”

In a company blog post published Monday morning, Cornell said that tapping CVS to operate its pharmacy and clinic businesses “gives Target greater bandwidth to focus on our strengths.” Since Cornell took the top job at Target in August, he has been focused on improving the retailer’s baby, kids, style and wellness departments in order to invigorate store traffic and sales. With the pharmacy reins turned over to CVS, Target will turn its own resources to other aspects of the wellness category, such as expanding its natural and organic food selection.

The deal needs to be approved by regulators. The companies said the timing of the transaction was “uncertain.” Target and CVS’s existing pharmacy locations together represent about 15 percent of the 60,000 pharmacies in the United States, CVS executives said.  The retailers have also agreed to jointly evaluate new locations for small-format TargetExpress stores that would have a CVS pharmacy inside.

CVS Health’s stock was up slightly in early Monday morning trading, while Target’s stock was up 1 percent.

The deal is CVS’s second acquisition in less than a month. The company said on May 21 that it is to purchase Omnicare, a pharmacy-related services provider, for $10.4 billion.

Target said it is not considering any similar deals for other categories of its business.