Express Scripts (ESRX) unveiled a $29.1 billion agreement on Thursday to take over rival Medco Health Solutions (MHS) in a deal that would create the industrys largest pharmacy benefits manager and seems likely to face high regulatory hurdles.

St. Louis-based Express Scripts said it will pay 0.81 of its stock and $28.80 in cash for each Medco share. That translates to a $71.36 offer for Medco, marking a 28% premium to the companys closing price on Wednesday.

The acquisition comes after Express lost a pair of big contracts in recent months, including a crucial account with UnitedHealth (UNH), which was revealed on Thursday. Pharmacy benefits managers provide drug benefits for businesses and health plans.

Once the deal closes, Express Scripts shareholders are expected to own about 59% of the combined company, while Medco shareholders would own 41%.

Its likely that regulators will look closely at this combination because it would create a new industry leader. CVS Caremark (CVS) would be the second largest PBM.

According to Dow Jones Newswires, Barclays analysts wrote in a note that Federal Trade Commission concerns are very real, especially in the mail-order business.

The companies said the deal includes termination fees in certain circumstances, but not for failing to receive a green light from regulators. Express Scripts said it sees the transaction closing in the first half of 2012.

Shares of Medco soared 15.53% to $64.45 Thursday morning, but traded well below the implied $71.36 offer price perhaps due to regulatory concerns. Express Scripts shareholders cheered the move, bidding the companys stock 6.20% higher to $55.85

We continue to have great confidence in moving forward as a stand-alone business, however, the incremental benefits of combining with Express Scripts are both logical and compelling, Medco CEO David Snow said in a statement.

George Paz, the CEO of Express Scripts, is set to serve as chairman and CEO of the combined company, which would be headquartered in St. Louis. The new companys board would be expanded by two to include a pair of current independent Medco board members.

This is the right deal at the right time for the right reasons," said Paz. The opportunity with Medco represents an attractive strategic combination which will provide the opportunity to move forward with a wide array of tools and resources to accomplish our goals."

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