Target selling its pharmacies, clinics to CVS for $1.9 billion

Target Corp.'s 1,660 pharmacies and 80 clinics inside its stores are being acquired by CVS Health Corp. in a $1.9 billion deal.

Those pharmacies and clinics will be rebranded and operated by CVS, the companies announced this morning.

The acquisition is one of the biggest transactions in Minnesota thus far this year. It comes as the Minneapolis-based retailer, under the leadership of CEO Brian Cornell, has been putting a greater emphasis on wellness.

"By partnering with CVS Health, we will offer our guests industry leading health care services, and at the same time, sharpen our focus on elevating the way we deliver wellness products and experiences to our guests," Cornell said in a statement.

Target said it expects the acquisition will bring more traffic and sales to its stores.

And for CVS, the deal allows the pharmacy and drug store chain access to new markets such as Seattle, Denver, Portland, and Salt Lake City, the companies said in a joint news release.

It is unclear when the deal will close, but it is expected to be by the end of this year.

"This strategic relationship with Target supports the highly complementary customer base, brand and culture we share," Larry Merlo, the CEO of CVS Health, said in a statement.

A Target spokeswoman said it's not yet clear how many headquarters jobs might be cut as part of this deal. She noted that much of the health care work is shared across many areas and said Target will "evaluate the business impact and the support needed moving forward at headquarters."

CVS will remain a long-term partner and will be included in all new Target stores that offer pharmacy services and will be included in 5 to 10 new smaller format Target stores known as TargetExpress. CVS will also open 20 new clinics in Target stores in the next three years.

Asked on a conference call with analysts how the deal came about, Merlo wasn't specific but said he has known Cornell for years.

"I've always been a fan of his in terms of how he's thought about the business," he said. "That relationship helped create a level of trust and confidence."

Merlo noted that Target's pharmacy business generates about $4.2 billion in annual revenue. Target's overall revenue is $73 billion.

Cornell elaborated on the deal in a post on Target's blog, saying that turning over the pharmacies to CVS will preserve their quality while freeing Target's financial and managerial resources. "It gives Target greater bandwidth to focus on our strengths in product design, merchandising and marketing to grow wellness as a signature category," he said.

After taxes, Target said it expected the net proceeds from the transaction to be about $1.2 billion, which it said it will use in part for share repurchases. The company's directors last week authorized a doubling in spending on share buybacks to $10 billion from $5 billion.

CVS said it is committed to offering comparable positions to the 14,000 Target employees who work at the pharmacies and clinics.

The sale of the pharmacies comes as Target is re-evaluating every part of its business. In the 10 months since Cornell arrived as chief executive, Target pulled the plug on its money-losing Canadian stores and laid off more than 2,000 corporate employees who work in the Twin Cities.

Target also jettisoned other non-core operations such as its streaming media business, Target Ticket, and its interior design business, Target Commercial Interiors.

"It makes perfect sense," Tom Charland, chief executive of Shoreview-based Merchant Medicine, a retail clinic research and consulting firm, said of the deal. "It fits in with the new leadership at Target. There's a whole new perspective at what Target should be focusing on."

While it's not necessarily unusual for retailers to outsource their in-store clinics, he said it is very rare for retailers to do so for their in-store pharmacies.

"This is a big deal," he said. "This is very unusual on that front."

On the clinics side, Charland noted that Target was one of MinuteClinic's first retail partners in 2003 before later being acquired by CVS. MinuteClinic was previously a Minneapolis-based company. In recent years, he said Target has seemed to be somewhat ambivalent with whether it wanted to go deeply into the clinics business, as evidenced by how slowly it added new locations.

The deal is expected to close at the end of this calendar year. The transition to the CVS brand will take place over six to eight months following the closing.