UPDATE 3-CVS buys Brazil's Onofre in first international deal

Wed Feb 6, 2013 1:20pm EST

* 8th biggest Brazilian chain boasts best efficiency ratios

* CEO sees no impact on finances in 2013

* CVS shares decline 0.8 percent after earnings report

By Jessica Wohl

Feb 6 (Reuters) - CVS Caremark Corp said on Wednesday it bought Drogaria Onofre, Brazil's eighth-largest drugstore chain last week, marking the first time the drugstore and pharmacy services company has ventured outside the United States.

Onofre's stores will continue to be managed locally by two brothers currently running the chain, and the acquisition should not affect CVS's finances in 2013, Chief Executive Larry Merlo told Reuters.

"We view Brazil as an attractive market given that healthcare and pharmacy are expected to grow double digits for the next decade," said Merlo. "It's still a highly fragmented market, so we see nice opportunity to grow the business."

Sao Paulo-based Onofre is Brazil's eighth biggest pharmacy group by sales, and the 18th largest by number of stores, according to local industry group Abrafarma.

The chain has Brazil's highest sales per square meter, per employee and per store, according to Onofre, due in part to its prominent locations in Sao Paulo, the country's biggest city. Merlo also credited the Brazilian chain with tailoring its stores well to different customer segments.

With few dominant groups and a swelling middle class, the Brazilian pharmacy industry has become a hotbed for recent mergers and acquisitions. In 2011 alone, a merger created market leader Raia Drogasil and rivals Pacheco and Drogaria Sao Paulo joined to become the country's runner up for sales.

Raia Drogasil shares fell as much as 4.9 percent in Sao Paulo trading to their lowest in two months. The shares recovered later in the day, trading down just 0.8 percent.

Shares of CVS slipped 0.8 percent after it also posted quarterly results that topped expectations.

U.S. DRUGSTORES GO INTERNATIONAL

Buying Drogaria Onofre, with its 44 stores in Brazil, is a small international start for CVS, which has more than 7,400 U.S. drugstores and opened 37 stores last quarter alone.

CVS got its start in 1963 when it opened its first store in Massachusetts, and its name stood for Consumer Value Stores. While CVS has expanded across the United States since then and added a large pharmacy benefits management business, the acquisition of Drogaria Onofre marks the first time that CVS has reached outside of its home country.

The move comes months after larger U.S. drugstore rival Walgreen Co stepped out of the United States for the first time when it bought a 45 percent stake in Europe's Alliance Boots, with the option to purchase the rest of it in about three years.

CVS did not disclose terms of the Drogaria Onofre deal. Walgreen paid Alliance Boots $7.02 billion in cash and stock for its stake when that deal closed in August.

Local media reported in December that CVS could take an 80 percent stake in Onofre for around 800 million reais ($400 million). Merlo declined to give details of the transaction.

A price in the $600 million range seems about right for the full business, said ISI Group analyst Ross Muken.

"It's interesting, it's obviously small," said Muken.

Market growth in Brazil "is so dynamic" that it makes sense for companies like CVS to pay attention, he added.

If CVS is successful with Onofre, Edward Jones health care analyst Judson Clark expects it to try to expand further in Brazil before branching out elsewhere.

"CVS is taking a more measured approach in expanding internationally, and our opinion of that is favorable," said Clark, who has a "buy" rating on CVS and a "hold" on Walgreen. "If it doesn't go well, their downside is pretty limited."

Brazil's highly-fragmented drugstore industry differs from the United States, where Walgreen, CVS and Rite Aid Corp dominate the market with roughly 20,000 stores collectively.

Raia Drogasil, Brazil's biggest pharmacy, posted revenue of 4.7 billion reais ($2.4 billion) in 2011. CVS posted revenue of $123.13 billion in 2012, with $63.7 billion coming from the retail side of its business.

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