Capital Markets

CFOs React: CVS/Caremark’s David Rickard

How to make a silk purse out of a Lehman's ear.
David KatzSeptember 19, 2008

At this moment, most CFOs are undoubtedly pondering the effects of the current crisis — and the federal government’s proposal for a solution to it — on their companies’ ability to raise capital, pay down debt, or cover their insurable risks. But for the many finance chiefs who work for companies that have relied on Lehman Brothers, AIG, and other financial institutions ensnarled in the mess, the involvement is more direct.

This afternoon, for example, David Rickard, CFO of CVS/Caremark Corp., is waiting for the expected announcement of the terms of Lehman’s bankruptcy with perhaps more interest than many. That’s because Lehman played a three-part role in CVS’s pending acquisition of Longs Drug Stores Corp.: as strategic advisers; as equal co-providers, with Deutsche Bank, of a $1.5 billion bridge loan to CVS; and as a minor player in a $4 billion backstop facility buttressing commercial paper offers by the pharmacy giant.

While CVS hasn’t needed help scoping out its own industry, Lehman Brothers advisers are “deal doers, and they know the ropes in [that] respect,” says Rickard, noting that the firm provided a fairness opinion concerning the Longs deal to CVS’s board, painstakingly explaining Lehman’s evaluation method. Last Friday, CVS management thought it “was merrily on its way,” all set to announce completion of the deal on Monday for $71.50 of Longs Shares, when the Walgreen Co. came up with an offer of $75 per share, the finance chief says.

That, of course, wasn’t all. Early Monday morning, Lehman filed for protection under Chapter 11 of the bankruptcy code. “When Lehman declared bankruptcy, we had to do a fair amount of thinking about what we should do,” Rickard told

On Tuesday Barclays Capital’s agreement to acquire Lehman Inc., the investment-banking division of the firm that CVS was dealing with, made that thinking a whole lot easier, the finance chief suggests. Lehman Brothers’ Holdings, the ailing parent company, would be split off from the subsidiary. Under that agreement — pending the bankruptcy deal — Rickard hopes to be using the same Lehman Inc. people and operating under the same terms and conditions as before.

Also on Tuesday, Longs issued a statement concluding that the Walgreen offer would not lead to a superior proposal to the one proffered by CVS. Although Walgreen has vowed to soldier on, Rickard believes the $115 million fee that Longs has agreed to pay to CVS if the deal falls through and the antitrust clearance that his company has already obtained might act as deterrents to Longs skipping out.

Actually, the Walgreen challenge has benefited CVS’s cash position by forcing it to delay completion of the deal from September 15 to October 15. CVS had started to build its commercial borrowing in anticipation of the September 15 date, but with the delay, the company has been able to make use of that money — by gobbling up commercial paper from others.

If all goes well, Rickard expects no problems with the bridge loan and commercial-paper backstop. After all, on September 2, the bridge loan was syndicated out to 10 other banks. Better yet: when Lehman’s difficulties became known, he says, “other commercial and investment banks called me and said, ‘If [the firm’s trouble] inconveniences you, we would be willing to step in and help out’” with the Longs deal, as well as more broadly. Further, some financial firms might want to provide fair-value modeling for the acquisition. “It’s not the biggest piece of the fee,” he adds, “but every million counts.”

The company also seems to have dodged a bullet by issuing one. On September 5, CVS issued what Rickard calls a “bullet”: a $350 million, two-year, floating-rate senior note to support the Longs acquisition. The CFO likes to think of the offering as one of the very last public debt offerings before the crisis went into overdrive.

The well has since dried up, however. “Money right now is not available. You can’t raise new debt today, and you haven’t been able to all this week,” Rickard said Friday.