updated 12/18/2006 7:59:15 AM ET 2006-12-18T12:59:15

U.S. pharmacy benefits manager Express Scripts Inc. said on Monday it was offering to buy rival Caremark RX for about $26 billion, threatening to break up a deal struck last month with drugstore chain CVS Corp.

The move would create the world's leading pharmacy benefit manager, giving the enlarged group increased buying power to demand lower prices from drug manufacturers.

Express Scripts said it was proposing paying Caremark shareholders $29.25 in cash and 0.426 shares in Express Scripts for every share held.

Based on Express's share price on Friday, that valued Caremark at $58.50 a share or 15 percent more than the all-stock offer from CVS, it said.

Rising healthcare costs mean drugmakers and pharmacies are under intense pressure to discount the price of medicines, while a recent move by Wal-Mart Stores Inc. into low-price generic drugs has spooked the industry.

Analysts said a key goal in the highly competitive landscape would be controlling costs and the battle for Caremark could spark other mergers.

"There is clearly scope for consolidation," said Paul Diggle, a pharmaceuticals industry analyst at Nomura Code in London.

"The business available for these guys to go after is very price sensitive and there is definitely a further tightening of the price screw."

Express said it anticipated annual cost savings of $500 million from the deal and for the transaction to be "significantly accretive" to earnings after the first year.

It said its offer was subject to Caremark terminating its deal with CVS, adding that it was prepared to solicit proxies against approval of the proposed CVS deal.

CVS said on November 1 it entered into an agreement to buy Caremark in a stock deal valuing the target at nearly $21 billion at the time, or $48.48 a share.

Under that deal CVS was offering 1.67 of its shares for each share in Caremark. At Friday's price of $30.52, CVS's deal valued Caremark at about $50.97 a share.

Express said that under its proposed deal Caremark shareholders would own 57 percent of the combined company, and Express shareholders 43 percent.

In a letter addressed to Caremark's board, Express's Chief Executive Officer George Paz said the offer was a "superior proposal" to CVS's.

He wrote that the offer gave a "significantly higher absolute value" and delivered "greater certainty of value" because it included a cash payment.

Express said it had received commitments from Citigroup and Credit Suisse to fully finance the proposed transaction.

Express said the offer value of $26 billion was based on Caremark having 436.1 million shares — consisting of 426.5 million basic shares and 9.6 million shares from the net effect of in-the-money options.

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