Express Scripts will buy rival Medco Health Solutions, parent company of United BioSource Corp., for $29.1 billion, creating a U.S. powerhouse in managing prescription drug benefits, the companies said, according to Reuters.

An experienced acquirer, Express Scripts would gain even more leverage for negotiating drug prices for its employer and other clients who have made it a priority to reduce their exposure to spiraling healthcare costs. Such expertise has made the industry's services all the more attractive.

The deal would give them greater clout against drugstore chains such as Walgreen and increase competition with CVS Caremark.

"This combined entity is a much better entity than the individual parts," Jefferies & Co analyst Arthur Henderson said. "This combination, from a growth standpoint, really improves the outlook. Once integrated, the growth is going to slow to some extent, but that may be several years away."

Express Scripts will pay $71.36 per Medco share, a 28% premium to yesterday’s closing price, the companies said. Medco shareholders will receive $28.80 in cash and 0.81 share for each Medco share they own, according to the terms of the deal.

Medco, the bigger company in terms of revenue, has lost two important contracts already this year. It said its account with UnitedHealth Group, which represents 17% of revenue, would not be renewed. UnitedHealth is building up its own drug benefits business and stands to become a serious competitor.

"Given the attrition risk Medco faces over the next few years, in regard to the UnitedHealth contract going away in 2013, and other publicized losses, it's a good deal for Medco and its shareholders," JMP Securities Constantine Davides said.

Pharmacy benefit managers, or PBMs, administer drug benefits for employers and health plans and also run extensive mail-order pharmacies. The deal between two of the "Big 3" PBMs would create a clear industry leader and could encounter antitrust hurdles.

The combined company would be the industry's largest, with 1.6 billion annual prescription claims, while CVS Caremark would be second at 940 million, Davides said.

Henderson said the combined company would have about 30% of the market for prescription claims.

The industry is also expected to gain over the next few years as a wave of widely used medicines become available as generics, which are more profitable for the companies.

Upon completion of the transaction, Express Scripts shareholders are expected to own about 59% of the combined company, with Medco shareholders owning about 41%. The combined company's corporate headquarters will be in St. Louis; Express Scripts chief George Paz will serve as chairman and CEO of the combined organization. The company's board of directors will be expanded to include two current independent Medco board members.

Express Scripts projected $1 billion in cost savings and other synergies—about 1% of the combined company's costs—and that the deal would slightly add to earnings in the first full year after closing. It is expected to close in the first half of 2012.

Henderson said the transaction could lead to far more in synergies than indicated by the companies. For Express Scripts, the Medco deal comes after its purchase of the drug benefit unit of insurer WellPoint for about $4.7 billion. It failed in its 2007 bid to wrest away Caremark from CVS. The Express-Medco deal would be the year's second-largest takeover.

Medco suffered a major setback in May when it lost a big pharmacy benefit contract to CVS. The surprising decision on that account followed closely on Medco losing a contract with Calpers, the biggest U.S. public pension fund.