• by Thom Forbes  @tforbes, June 16, 2015

Target is selling its 1,660 in-house pharmacies in 47 states to CVS Health for $1.9 billion in a deal that most observers are applauding as a win for both sides. They will be operated in a store-within-a-store format and branded as CVS/pharmacy. 

“This strategic relationship with Target supports the highly complementary customer base, brand and culture we share,” said Larry Merlo, CVS Health president and CEO in a statement. “When we introduced the new name for our company, CVS Health, we began a new era of growth with a broader health care focus and an appreciation of the rise of health care consumerism with consumer choice and accountability growing.”

CVS will be able to expand its footprint “at roughly 20% of the capital cost of building the equivalent number of full-size CVS stores,” Charley Grant reports in the Wall Street Journal, and also will be moving into new markets such as Seattle and Denver. 

Additionally, Target’s nearly 80 clinic locations will be rebranded as walk-in MinuteClinics after the deal closes — the companies hope that’s before the end of the year — and CVS Health will open up to 20 new clinics in Target stores within three years. 

The Federal Trade Commission will need to weigh in on the sale but no one seems to be raising any flags. 

The deal “seems like a no-brainer for Target because, in addition to the obvious $1.9 billion payday, they don't have any real edge in the pharmacy space so offloading this business should boost their margins,” observes CNBC “Mad Money” host Jim Cramer. Over the last week, Cramer has been “highlighting the health care group as being ripe for consolidation,” points out CNBC producer Abigail Stevenson, as the population both ages and gets better access to insurance coverage through Obamacare.

“Why invite a retail competitor inside your stores?” asks USA Today’s Nathan Bomey before listing and elaborating on five good reasons to do so. In short: 1. Health care is complex and requires knowledgeable workers. 2. Target was losing money on its operation. 3. Its footprint is much smaller than CVS’, which currently has more than 7,800 outsets, many of which are open 24 hours. 4. Target has other priorities such as “reinventing food.” 5. It will get more foot traffic from existing CVS customers.

Similarly, Phil Wahba offers “five reasons Target's deal with CVS Health makes it leaner and meaner” at Fortune. His insights include the fact that it can “speed up its rollout of smaller format stores”; it can “improve the healthfulness” of its assortment and there will be “less distraction from what matters: e-commerce, better food and more localization.”

CVS Health says it will finance the acquisition with additional debt.

“CVS Health is building a business that has a lot of interlocking synergies in many different parts of the health care system,” Adam J. Fein, president of Pembroke Consulting, tells the New York Times’ Katie Thomas, Chad Bray and Hiroko Tabuchi. “The Target deal is one more step in their goal of becoming the most significant company in the drug distribution and reimbursement system.”

The Times reporters point out that “Target’s pharmacies earned favorable marks from consumers, performing above the average for mass merchandisers in a 2014 J. D. Power study of customer satisfaction with pharmacies. CVS, by contrast, scored below average for chain drugstores.”

If the acquisition goes through, the Chicago Tribune’s Ameet Sachdev reports “CVS will overtake Walgreens as the largest U.S. drugstore chain, with about 9,435 locations compared with 8,232.”

Walgreens plans to close 200 stores and reorganize corporate and field operations in reducing its costs by $1.5 billion over three years. Its acquisition of the European pharmacy chain Alliance Boots “has brought massive upheaval,” Sachdev writes, with “several Alliance Boots executives replacing their Walgreens counterparts.”

Meanwhile, Reuter’s Nandita Bose and Nathan Layne suggest the CVS health/Target agreement may encourage large supermarket chains with struggling pharmacies to look for professional drug store partners of their own,” quoting AT Kearney partner Todd Huseby in support of the idea. 

“Supermarkets with pharmacies such as Kroger, Safeway and Stop & Shop saw a 0.6% increase in the number of prescriptions filled, but a 0.17% decline in prescription market share in 2014 from a year earlier,” according to data they cite from Fein's blog “Drug Channels.”