Asked at a conference Monday about companies with lots of cash on their balance sheets, CFO David Rickard laughed and noted that his company, CVS, was in the middle of a $5 billion share buyback.
But CVS isn’t just using cash to fund its share repurchase program. Fresh off its mega March merger, the newly formed CVS/Caremark is offering $5.5 billion in debt in a multi-part deal, and Fitch Ratings reports that part of the proceeds will be used to finance the company’s $5 billion share repurchase program, half of which was completed on May 13 through an accelerated share repurchase program. The balance will be used to pay down a bridge loan and commercial paper, and for general corporate purposes, according to a company filing.
The debt offering is the largest by an investment-grade company since Anadarko Petroleum sold $5.5 billion last September, according to Reuters, which cited Dealogic.
According to Reuters, the CVS/Caremark offering includes three-year floating-rate notes, 10- and 20-year fixed-rate notes, and a hybrid called ECAPS (enhanced capital-advantaged preferred securities) that combines features of debt and equity to obtain favorable tax treatment.
Hybrids have been issued at a record pace this year, reported Reuters, though it stressed that some new issues have not performed as well as straight debt. “People are getting concerned about the complexity of the structures and how risk is being priced in the market,” Mirko Mikelic, senior portfolio manager at Fifth Third Asset Management, told the wire service.
On Monday, Moody’s Investors Service affirmed the Baa2 senior unsecured rating of CVS Caremark. It also assigned a Baa2 rating to the three pending senior note issues, assigned a Baa3 rating to the pending ECAPS, and revised the rating outlook to stable from negative.
Fitch Ratings assigned an “investment grade” rating to the company’s debt. “The ratings reflect CVS’s strong brand name and leading market positions, which have led to a strong operating performance as well as positive industry fundamentals,” Fitch wrote in a report. “CVS holds the number one position in retail pharmacy sales and pharmacy benefit management lives managed. The ratings also consider the company’s increased leverage following its recent merger, challenges associated with integrating the company’s operations and the highly competitive operating environment.”
On Monday, Rickard predicted that the company won’t make another acquisition for at least another five years. “We don’t plan on doing acquisitions, we plan to grow organically,” he said during a seminar about long-term growth at a Financial Executives International conference. CVS/Caremark does that by expanding its locations, and the company plans to grow its square footage by 3 to 4 percent each year, Rickard elaborated.