Rite Aid Corp (RADCQ)

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CVS Health found a way to expand at a discount, and investors ought to feel good about it.

The pharmacy giant on Monday announced a $1.9 billion cash purchase of Target's pharmacies and clinic business. This allows CVS to expand its retail footprint: It gets 1,660 pharmacies located within Target stores. And it allows CVS to expand into new markets such as Seattle and Denver. The business to be acquired generates annual revenue of $4.2 billion, while CVS revenue from its retail pharmacy business comes to about $48 billion, according to Cowen & Co.

The price is right, too. CVS finance chief David Denton said Monday that the deal would allow the company to expand at roughly 20% of the capital cost of building the equivalent number of full-size CVS stores. Furthermore, there should be room for productivity gains. According to Cowen analysts, the pharmacies to be acquired generate about $2.5 million in annual revenue per location, while pharmacy revenue from CVS retail locations average about $6 million. The deal will enable CVS to use its scale in the pharmacy business to generate cost savings at the new locations, according to CVS chief Larry Merlo.

The efficient use of capital doesn't mean the acquisition is a free lunch, of course. The deal comes in the wake of CVS's announcement last month of a $10.4 billion acquisition of Omnicare to bolster its benefit-management business.

CVS will be using debt to fund both deals. When adjusting for off-balance-sheet obligations like lease agreements, debt to earnings before interest, taxes, depreciation and amortization is expected to reach 3.2 times when both deals close. That is well above a year-end ratio of 2.4 times and the company's leverage target of 2.7 times. Given this, CVS plans to trim its planned share repurchases by $1 billion this year, to $5 billion.

CVS expects the deal to be modestly dilutive to 2016 earnings per share, primarily due to the slowing buybacks. But with the stock near its record high, investing in a growth opportunity seems like a better use of capital. That should keep investors' blood pressure in check.

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