Overview of the deal
Acquirer: CVS Health Corporation (NYSE: CVS)
Target: Aetna Inc. (NYSE: AET)
Estimated value: $69bn ($77bn including net debt)
Announcement date: 3/12 - 2017
Acquirer Advisors: Barclays and Goldman Sachs; Centerview Partners (Board of Directors)
Target Advisors: Lazard and Allen & Company; Evercore (Board of Directors)
There are two main reasons for CVS to acquire Aetna. Firstly, if CVS buys Aetna, it will have a stronger bargaining power compared to competing pharmaceutical companies. CVS may gain a competitive advantage by reducing the cost of providing care to Aetna’s customers, as they have the ability to provide both insurance and care directly. Targeting both customer groups will also increase the number of customers for the company. Secondly, Amazon’s plans to sell drugs through its online platform further motivates the deal. CVS’s and Aetna’s businesses have been growing closer together in the past years and the threat of Amazon becoming a strong competitor has been a significant factor for the merger.
“The CVS-Aetna deal is an effort at vertical integration, which by removing rent-seeking middlemen can, in theory at least, lead to more choice. This deal could make CVS a more formidable competitor against possible new entrants, such as Amazon. Besides that, CVS could extract efficiencies by cutting out the middlemen in the health-care supply.” -The Economist
Company details (CVS Health)
CVS Health is America’s largest drugstore chain, providing integrated healthcare services. The company has over 9,700 retail pharmacies and 90 million plan members.
- Founded in 1892 and headquartered in Woonsocket, United States
- President and CEO: Larry Merlo (since 2011)
- Number of employees: 158,000
- Market Cap: $72.7bn - EV: $97.5bn
- LTM Revenue: $182.4bn - LTM EBITDA: $12.3bn
- LTM EV/Revenue: 0.5x - LTM EV/EBITDA: 7.9x
Company details (Aetna)
Aetna is one of the world’s largest providers of healthcare insurance, serving 46 million people.
- Founded in 1853 and headquartered in Hartford, United States
- CEO: Mark Bertolini (since 2010)
- Number of employees: 49,000
- Market Cap: $58.8bn - EV: $61.1bn
- LTM Revenue: $61.4bn - LTM EBITDA: $6.0bn
- LTM EV/Revenue: 1.0x - LTM EV/EBITDA: 10.2x
Projections and assumptions
The DoJ’s second request for information for its antitrust review adds to the uncertainty of the deal, but CVS nonetheless expects the deal to close during the second half of this year. Although the deal is considered vertical, CVS’s increased control over the flow of prescriptions could limit competition.
If the deal clears, the combined company will have a yearly revenue exceeding $221.4bn – a 24.7% increase over 2016 revenue. The merger is expected to produce $750m in cost savings during the first year. On the downside, the $45bn loan used to finance the deal will significantly weaken CVS’s credit metrics.
The deal is likely to allow Aetna to cut costs and CVS to increase revenue. Patients that are easily treated could, instead of being referred to expensive hospitals, be treated at one of CVS’s planned minute-clinics – allowing healthcare costs to be cut. Through passing on some of these cost cuts to customers, CVS hopes to win more business.
Healthcare is the highest line-item budget of consumer spending in the US. CVS Health & Aetna combined would be the biggest healthcare firm by revenue. This deal seeks to create an integrated system of retail and health insurance that could effectively challenge competitors, such as UnitedHealthcare and Amazon.
The deal could also benefit the complementarity of both firms by bending the cost curve. CVS could leverage negotiations with drug makers, gain more health data about insured, while Aetna would get 9,600 doors to the healthcare system. CVS stores would provide consumers with not only products but also service offerings from Aetna.
Given the expected synergies, the deal may have a significant long-term impact on the US healthcare industry. With an ageing US population, increasing healthcare consumerism and growth in expenditures, companies are forced to adapt in order to tackle these challenges. In this dynamic environment, the acquisition of Aetna increases CVS’s chances of remaining an industry leader as new challengers arise.
Risks and uncertainties
While the strategic rationale for the acquisition makes sense, there are a few risk factors stakeholders ought to keep in mind. First and foremost, it should be noted that it is impossible to tell how the combined company’s leverage could be used, as such a concentration of power in the healthcare system is unprecedented. Recently, the DoJ has become more sceptical of so-called vertical mergers, but according to lawyers for both sides, the deal is expected to clear any regulatory difficulties. It should also be taken into account that the acquisition will initially be financed with a bridge loan. Given the long time period between the announcement, the acquisition and the financing of the long-term debt to replace the bridge facility, a risk factor constitutes the unknown interest rates. Coupled with the fact that we are in a rate-hiking cycle, fluctuations on the price of long-term corporate bonds are likely to affect how the market choose to view this transaction. Looking ahead, investors should keep an eye on three American giants - Amazon, JP Morgan Chase and Berkshire Hathaway - which announced that they are forming a new healthcare company. For the time being, the plan will focus solely on the staff of the companies, but it remains to be seen if it stays that way. The announcement was enough to sink healthcare stocks and CVS Health was not an exception, rendering the stock to fall 4.9%.
“The combination of a vast drugstore chain with an insurer is the first in the US, and although it will not consolidate either sector, the deal is still likely to be closely scrutinised by antitrust regulators, which are concerned about any one company amassing too much consumer power.”
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