Drugstore chain CVS Caremark agreed to buy Universal American's Medicare prescription drug business for about $1.25 billion.

The deal will more than double the size of CVS Caremark's business that provides prescription drug coverage under the Medicare Part D program. Medicare is the U.S. government's healthcare program for the elderly.

CVS will buy all of Universal American's shares outstanding and then distribute stock in a newly formed public company to Universal American shareholders. The newly formed company will own all other operations of Universal American, including its Medicare Advantage and traditional insurance businesses.

Universal American shareholders are also expected to receive about $12.80 per share to $13.00 per share in cash for the business. Universal American shares closed at $14.61 on Thursday.

CVS said on Friday it expects the deal to add to its earnings in its first full year.

Universal American serves about 1.9 million Medicare prescription drug plan members, while CVS Caremark serves about 1.2 million Medicare drug plan members.

CVS said the deal won't affect its previously announced plans for dividends and share buybacks. It will provide further details about the deal when it gives its 2011 outlook on February 3.

Goldman Sachs is acting as financial adviser to Universal American, and Paul, Weiss, Rifkind, Wharton & Garrison LLP is acting as its legal counsel.

(Reporting by Dhanya Skariachan; Editing by Steve Orlofsky)