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Want to Add a Decade of Cash Flow? Buy It

By acquiring WellPoint's pharmacy benefits business, Express Scripts added 25 million new clients, CFO Jeff Hall says.
David M. Katz, CFO.com | US
April 15, 2009

When Express Scripts acquired the pharmacy-benefit-management business of WellPoint in a $4.675 billion deal announced Monday, an important part of the linchpin of the deal for Express Scripts was its acquisition of ten years worth of projected cash flow and 25 million new clients, says Jeff Hall, the company's CFO.  

As part of the deal, Express Scripts, a leading pharmacy-benefit manager, inked a decade-long contract with WellPoint, one of the nation's biggest managed-care providers, under which the former would provide services to the latter. "They sold us the business," Hall told CFO.com on Tuesday, noting that through the long-term contract, the company would gain 25 million people it can work with to help lower their costs.

That potential business apparently came at a cost, however. Although he refused to give a dollar figure for what the service contract was worth, Hall noted that it was a "significant portion" of the $4.675 billion purchase price.

Also included for the purchase price was consideration for the value of a future tax benefit for Express Scripts based on the structure of the transaction.  As a result of the arrangement, the company will be able to claim a depreciation on most of the purchase price over 15 years, according to Hall.  Assuming the company's 37 percent tax bracket, it would get about $300 million a year of tax deductions, which will amount to $100 million to $125 million a year in tax savings. Without that advantage, Express Scripts would have paid a billion dollars less for the deal, says Hall.

In putting the acquisition together overall, the finance chief was particularly focused on getting an accurate assessment of how much cash WellPoint's business would produce in the future. "As CFO, probably most importantly, I had to make sure that the value we were receiving was in line with the price we were paying," said Hall, who has been with company for about a year. Along with Express Scripts' general counsel, Hall did most of the negotiations, worked out issues of structure and synergy, and modeled his company's potential future cash flows in the deal.

For the assets of  WellPoint's NextRx subsidiaries, Express Scripts will pay cash and up to $1.4 billion worth of the company's stock. The company, which doesn't have the balance of about $3 billion on hand at the moment, has "committed financing" for that amount, he said, acknowledging that Express Scripts isn't yet ready to reveal what kind of financing that is.

Suffice it to say that the funding wasn't a snap to find. "It was for sure the most difficult financing environment I've ever seen," said Hall, who has been in finance for 20 years, most recently as CFO of KLA-Tencor, a semiconductor manufacturer. "We spent far more time thinking about the potential sources and then executing [the financing agreement] than it would have taken in years passed."




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