In an open letter to investors, Carl Icahn urged shareholders to vote against the $54B Cigna (CI)-Express Scripts (ESRX) deal, as he believes the former is "dramatically overpaying" for a company "facing existential risks on several fronts". Regardless of how the deal plays out, Barclays analyst Steve Valiquette still sees upside for Cigna in both merger vote scenarios.

ICAHN SAYS CIGNA 'DRAMATICALLY' OVERPAYING: In an open letter to stockholders of Cigna, Carl Icahn said that the insurer is "dramatically overpaying for a highly challenged Express Scripts that is facing existential risks on several fronts." The billionaire investor went on to say: "Regulatory risk due to opposition to the highly flawed rebate system will likely lower Express Scripts' profitability dramatically... [The significant problem of prescription drug pricing in America today] is a critical issue that must be addressed and eliminating conflicting reward systems and over-earning middlemen is the logical first step. Competitive risk from Amazon [AMZN], arguably the strongest competitor in the world, will be an existential threat to PBMs like Express Scripts, possibly challenging their very existence. Express Scripts could lose more customers like Anthem [ANTM] as it ceases to be independent and certain large MCOs and affiliated plans do not wish to deal with a company which is owned by one of their competitors. With Cigna's likely standalone value today of $215 and Express Scripts' likely standalone value less than $60, it's a travesty to complete this deal. Paying an over 50% premium to a company whose very existence may be challenged is a potentially massive destruction of Cigna shareholder value." As an alternative, he believes Cigna should pursue a multi-year partnership with an existing PBM provider, potentially Express Scripts, while the industry resolves its structural challenges and while Cigna management "can further develop or acquire their own PBM capabilities optimized for the rapidly changing regulatory and competitive environment". He adds that "there may well not be a need for PBM capabilities once the landscape changes and/or Amazon and other competitors materialize." Icahn also thinks that if Cigna were to use the cash portion of the Express Scripts consideration and free cash flow to "aggressively" repurchase its own shares, this could "result in a Cigna target price of over $250 in a reasonable timeframe". 

DEAL OR NO DEAL: Barclays' Valiquette pointed out in a research note to investors that Cigna's shareholders will vote on the company's proposed acquisition of Express Scripts on August 24, which he views as one of the last remaining major hurdles for the deal as the anti-trust risk stemming from the current review by the Department of Justice may now be low. Under a deal break scenario, Cigna should trade at a multiple relatively in-line to diversified peer Anthem, implying a fair value of $215, he contended. If the deal is approved, the analyst sees Cigna shares falling to $180 in the near-term. However, his sum-of-the-parts analysis yields a current fair value of $213 per share. As such, Valiquette sees upside potential on Cigna in both merger vote scenarios. The analyst reiterated an Overweight rating on Cigna's shares.

PRICE ACTION: In morning trading, shares of Cigna have gained about 0.5% to $188.51, while Express Scripts' stock has advanced about 1% to $77.66.