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This excerpt taken from the CVS 8-K filed Feb 13, 2007. Comparable Company Analysis
CVS In order to assess how the public market values shares of similar publicly traded companies, Lehman Brothers, based on its experience with companies in the drugstore industry, reviewed and compared specific financial and operating data relating to CVS with the following selected companies that Lehman Brothers deemed comparable to CVS, including:
As part of its comparable company analysis, Lehman Brothers calculated and analyzed CVS’ and each comparable company’s ratio of current stock price to its projected earnings per share (commonly referred to as a price earnings ratio, or P/E). Lehman Brothers also calculated and analyzed various financial multiples, including CVS’ and each comparable company’s enterprise value to certain projected financial criteria (such as EBITDA). The enterprise value of each company was obtained by adding its short- and long-term debt to the sum of the market value of its common equity and subtracting its cash and cash equivalents. All of these calculations were performed, and based on publicly available financial data (including First Call and Wall Street research estimates) and closing prices, as of February 9, 2007, the last trading date prior to the 15 delivery of Lehman Brothers’ February 12, 2007 opinion. Using a selected multiple range of 18.0x to 20.0x 2007 estimated earnings per share and selected multiples of 10.0x to 12.0x 2006 EBITDA, the peer group trading analysis of CVS yielded an implied valuation range for CVS common stock of $31.45 to $38.66 per share. The following presents the results of this analysis:
Caremark In order to assess how the public market values shares of similar publicly traded companies, Lehman Brothers, based on its experience with companies in the pharmacy benefit management industry, reviewed and compared specific financial and operating data relating to Caremark with the following selected companies that Lehman Brothers deemed comparable to Caremark, including:
As part of its comparable company analysis, Lehman Brothers calculated and analyzed Caremark’s and each comparable company’s P/E ratio. Lehman Brothers also calculated and analyzed various financial multiples, including Caremark’s and each comparable company’s enterprise value to certain projected financial criteria such as EBITDA. All of these calculations were performed, and based on publicly available financial data (including First Call and Wall Street research estimates) and closing prices, as of February 9, 2007, the last trading date prior to the delivery of Lehman Brothers’ February 12, 2007 opinion. Using a selected multiple range of 18.0x to 21.0x 2007 estimated earnings per share and selected multiples of 11.0x to 12.0x 2006 estimated EBITDA, and after taking into account the payment of the Caremark special cash dividend, the peer group trading analysis of Caremark yielded an implied valuation range for Caremark common stock of $44.16 to $55.06. The following presents the results of this analysis:
Lehman Brothers selected the comparable companies above because their businesses and operating profiles are reasonably similar to that of CVS and Caremark, respectively. However, 16 because of the inherent differences between the business, operations and prospects of CVS and Caremark and the businesses, operations and prospects of the selected comparable companies, no comparable company is exactly the same as CVS or Caremark, respectively. Therefore, Lehman Brothers believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the comparable company analyses. Accordingly, Lehman Brothers also made qualitative judgments concerning differences between the financial and operating characteristics and prospects of CVS and Caremark and the companies included in the comparable company analyses that would affect the public trading values of each in order to provide a context in which to consider the results of the quantitative analyses. These qualitative judgments related primarily to the differing sizes, growth prospects, profitability levels and degree of operational risk between CVS and Caremark and the companies included in the comparable company analyses.
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