CVS Said To Bid Over $66B To Buy Aetna As Amazon Threat Looms
Shares of Aetna (AET) are in focus in morning trading after CVS Health (CVS) reportedly made a more than $66B offer for the insurer, according to The Wall Street Journal. The report said the two sides have been in discussions about a deal for at least two months. The Aetna/CVS rumors are heating up amid another report that said Amazon (AMZN) has secured licenses in 12 states to become a wholesale prescription drug distributor.
CVS/AETNA: CVS Health has offered to buy Aetna for more than $66B, or over $200 per share, The Wall Street Journal reported on Thursday, citing people familiar with the matter. According to the people, the companies' CEOs, CVS Health's Larry Merlo and Aetna's Mark Bertolini, have met "multiple" times over the last six months. CVS was reportedly prompted to make a move on Aetna due to the looming threat that Amazon will enter the pharmacy business, and a person familiar with the matter said CVS felt its move should be "dramatic" after regulators recently rejected peer Walgreens Boots Alliance's (WBA) proposed acquisition of Rite Aid (RAD). According to The New York Times, a combined CVS and Aetna would have annual revenues of about $240B, and could see more leverage in negotiations with drug companies, helping CVS to defend against Amazon.
AMAZON THREAT: Amazon has secured wholesale pharmacy licenses in "at least" 12 states, including Nevada, Arizona, North Dakota, Louisiana and New Hampshire, according to a report from the St. Louis Post-Dispatch on Thursday, which cited a review of public records. Amazon has already been making a move into the brick-and-mortar retail sector through its acquisition of Whole Foods in the last few months. Earlier this month, Amazon was said to be looking at entering the retail pharmacy industry, with Leerink analyst Ana Gupte saying at the time that she she believed that Amazon "will almost certainly" enter the drug distribution value chain within two years, evolving into a more "disruptive" offering over time. She said Amazon's potential move is most threatening for retail players like CVS, Walgreens and Wal-Mart (WMT), and provides both an opportunity and a threat for Express Scripts (ESRX).
CVS/AETNA DEAL SEEN AS 'LOGICAL': Jefferies analyst Brian Tanquilut said in a note to clients that a potential deal between CVS and Aetna "should not come as a surprise," as it is a "logical progression of the two companies' relationship." The analyst believes CVS could pay up to $207 per share for Aetna in a stock and cash transaction, but could perhaps pay slightly above that price. Piper Jaffray analyst Sarah James agreed that the valuation and timing make sense for a deal between the companies, and that the WSJ's report of the deal follow Anthem (ANTM), Express Scripts' largest customer, opting to leave the pharmacy benefits manager in 2019 for CVS, whose largest customer is Aetna. JPMorgan analyst Lisa Gill views the potential deal as a strategic positive for CVS, as a scaled integrated health insurer/pharmacy benefits manager model has proven to be a strong competitor, which lowers risk. She does not expect a competing bidder to emerge for Aetna.
SOME ANALYSTS CAUTIOUS: Loop Capital analyst Andrew Wolf said a Aetna/CVS deal would not be compelling in the near-term as it would require more debt financing or greater synergies than he assumed to be meaningfully accretive to earnings. Cantor Fitzgerald analyst Steven Halper, who downgraded Aetna to Neutral last night, said it is "impossible" to determine if a deal will occur and at what price, adding that shares are now fairly valued. Cowen analyst Charles Rhyee said a deal makes sense, but is concerned by a potentially high risk/reward. Near-term synergies could occur, he said, but argues that a longer-term vision of coordinated care is many years out.
OTHERS TO WATCH: Other retail pharmacies include Walgreens Boots Alliance and Rite Aid. Publicly traded companies in the insurance space include Anthem, Molina Healthcare (MOH), Centene (CNC), Cigna (CI), Health Net (HNT), Humana (HUM), UnitedHealth (UNH) and WellCare (WCG).
PRICE ACTION: In morning trading, Aetna reversed earlier gains and is now down 2% to $176.60 and CVS is down 4% to $70.37. Meanwhile, Amazon is up over 11% following its earnings report last night.