As I previously reported in October, CVS Health (NYSE: CVS – $71.02) said it has agreed to acquire Aetna, Inc. in a transaction valued at about $69 billion. Under the terms, CVS will acquire all of Aetna’s outstanding shares for a consideration of $207 per share, consisting of $145 in cash and 0.8378 CVS common share for each Aetna share. Including the assumption of Aetna’s debt, the total value of the transaction is $77 billion, the largest acquisition announcement this year. The pact pulls together two titans from opposite corners of the healthcare space. CVS has $178 billion in annual revenues via its drugstores and sizable pharmacy benefits management arm, while Aetna is the third-largest U.S. health insurer, with more than 22.2 million members and $63 billion in annual revenues. CVS said it expects “low- to mid-single digit accretion (to earnings)” in the second full year after the close of the transaction, and $750 million in near-term synergies. The deal is expected to close in the second half of 2018, subject to shareholder and regulatory approvals – which is far from certain – and other customary closing conditions. While clearly a vertical integration of two disparate companies, regulators will be combing through the details of this combination, especially since both companies are engaged in providing Part D Medicare benefits.
As part of the acquisition, CVS is planning to significantly expand health services at its retail pharmacies if the deal is completed. The move could save more than $1 billion annually in cutting back emergency room visits for Aetna’s 23 million members by directing them to CVS’s expanding MinuteClinic walk-in centers operating in 1,100 of the company’s 9,700 retail pharmacies. The collaboration should further extend into the community through CVS’s Omnicare’s senior/long-term care pharmacy solutions and Coram’s infusion services.
The shares of CVS are trading 4.7% lower on the news, as investors are concerned about the price being paid for Aetna and questioning the potential savings.CVS, along with its peers, are fighting drug pricing concerns and pending competition from Amazon.com, thus needing to find ways to stay ahead of the healthcare curve. Personally, I favor the deal and believe the shares, yielding 2.7%, are undervalued at 11 times estimated 2018 earnings of $6.34 per share. Positions in CVS Health can continue to be held for eventual long-term recovery.