Will CVS Get the Chance to Buy Aetna?

Will CVS Get the Chance to Buy Aetna?

In this Market Foolery  podcast, host Chris Hill is joined by Industry Focus: Healthcare host, Kristine Harjes, to dig into CVS Health ‘s (NYSE: CVS) offer to purchase insurer Aetna (NYSE: AET)  for $69 billion. Rumors of the acquisition talks had been in the air for weeks, and the shares didn’t move much on the news that confirmed them. The real questions from here start with a big one: Will regulators actually let these two combine into a vertically integrated healthcare monolith? Based on the share prices, Wall Street isn’t feeling terribly sure.

A full transcript follows the video.

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This video was recorded on Dec. 4, 2017.

Chris Hill: The news fairy showed up on Sunday, as some of you might have seen, in the form of a massive healthcare deal: CVS buying Aetna for the tidy sum of $69 billion. And that’s why the host of the Healthcare edition of Industry Focus is in the studio with me. There’s a lot to get to with this deal, so let me start with this. When you saw the news, what was the first thing that went through your mind?

Kristine Harjes: I was like, “Oh, that, finally!” [laughs]

Hill: It has been — I was going to say rumored, but it has been reported for weeks now that these two have been talking.

Harjes: Yeah, these details are not really that surprising at all. Even the fact that CVS is looking to do a deal like this is not surprising at all. We’ve known for a while now that management’s looking at 2017 as a rebuilding year for CVS, and they have pretty heavily foreshadowed that an acquisition was going to come at some point. So here it is.

Hill: So who is excited about this deal? At the moment, shares of CVS are down a little bit, shares of Aetna essentially flat. We’ve seen plenty of mergers and acquisitions, smaller than this, in 2017 where both stocks are up. It’s viewed by investors as a win-win. So who’s excited about this deal?

Harjes: Maybe some traders looking to make a quick buck. If you look at shares of Aetna, they are down pretty substantially below the buyout price that’s been announced. Aetna is trading for about $184 right now. But the buyout is for $207 per share. So if you think this is going to go through, you can make a nice 10% or so. But that huge arbitrage opportunity is so indicative that people don’t think this is going to go through. It remains to be seen, but there are a lot of big hang-ups surrounding it.

Hill: So from a regulatory standpoint, people don’t think this is going to go through?

Harjes: Yeah.

Hill: I get that the resulting company would be massive, but these are not two businesses that really have a ton of overlap.

Harjes: Yeah, which I think makes this really interesting. There’s a lot of skepticism about it, but it’s a vertical-natured organization where you have Aetna, which is an insurer, and you have CVS, which has the retail pharmacies that we all know and maybe love, and they also have the PBM side, which is your pharmacy benefits manager, and that works with Aetna, but that’s pretty much the extent of the overlap between these two industries. There’s a little bit here and there, but by and large, they are two very different companies, and they’re not competitors with each other, which usually, when you see antitrust come through and block a merger, it’s because it would be too big; it would cause prices to go up because there isn’t enough competition.

But the whole point of this, if you listen to management, anyway, is to bring costs down. So if you believe them, maybe it wouldn’t be blocked. But you also look at some other similar mergers that haven’t gone through as easily. Consider AT&T  and Time Warner . Those are two very different companies, too. They’re not competitors. It’s a content company and a content distributor. So, again, in a similar line of industry. They’re not your typical antitrust case, but yet the DoE sued to block it.

Hill: So I have to believe that, among the businesses that are probably going to make their opinion known, if not publicly, certainly quietly, to regulators against this deal, I’m assuming UnitedHealth (NYSE: UNH) is one, because the resulting company here would, I don’t want to say it would dwarf UnitedHealth — it wouldn’t — but it would surpass UnitedHealth, which is currently the largest insurer in the U.S. I would put Walgreens  on that list, too. If I’m Walgreens, I’m probably terrified at this deal.

Harjes: Yes and no. It depends on what you think the result is going to be of the merger. They claim that they’re going to have a ton of synergies and they’re going to be able to leverage all this data and have a stickier relationship with different customers. I don’t know if I really buy it. For example, there’s been a lot of talk about how now, when you go into the walk-in clinics at CVS, you can get somebody that’s very hands-on who can take care of you, and on your way out you’ll be able to pick up your prescriptions and also pick up some of the other things that CVS sells in the front end of the store, and as an Aetna customer, you’ll be incentivized to do that. But I currently have UnitedHealthcare insurance, and I can go to these clinics and I’m covered. So I’m not really sure why I might be even more incentivized. Maybe I get an extra discount at CVS stores? I don’t know. Unless there’s a reason why UnitedHealthcare’s patients wouldn’t want to go to these Minute Clinics, I don’t get why UNH would be against this deal.

Hill: So let’s, for the sake of argument, assume that the pessimists are right, that this deal gets blocked. Do you anticipate CVS going after another smaller insurance company? They’re clearly looking to buy someone. So is it absolutely going to be another insurer? Or where do they go if this gets blocked? I realize it’s a crystal-ball question.

Harjes: That is definitely asking me to peer into a murky, at best, type crystal ball. I don’t know. CVS is clearly pretty afraid of the Amazon (NASDAQ: AMZN) potential threat. I mean, who isn’t? Amazon is a threat to pretty much all companies out there, particularly ones that have a retail footprint. So CVS is looking to find a way to guarantee that their retail stores succeed. Unless they want to divest themselves of their stores and just go the PBM route, or maybe do a mail-order pharmacy-slash-drugstore that ships things to you Amazon-style, they’re going to have to find a way to make their walk-in stores more appealing to people. And how exactly they would go about doing that, whether it would be via a merger or not, I’m not really sure.

Hill: On Wednesday’s episode of Industry Focus , safe to say you’ll be talking about this, at least a little bit? Or is this checking that box for you?

Harjes: We’ll see. I’ll definitely point listeners to this episode, but we actually covered this pretty extensively on the show a few weeks ago, when the rumors first started circulating. We’ll see what Todd thinks, my usual co-host.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Chris Hill owns shares of Amazon. Kristine Harjes has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health, Time Warner, and UnitedHealth Group. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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