CVS to Buy Aetna for $67.5 Billion, Remaking Sector

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CVS Health will buy Aetna for about $67.5 billion, according to a person familiar with the matter, creating a health-care and retail giant that will have a hand in everything from insurance to the corner drugstore.

CVS will pay $207 a share for Aetna, made up of $145 a share in cash and the rest in stock, according to the person, who spoke on condition of anonymity. That's a 29 percent premium to Aetna's share price on Oct. 25, the day before the companies were said to be in talks.

The deal, among the biggest health-care mergers of the last decade, is expected to be officially announced later Sunday, according to the person. Including CVS's assumption of Aetna's debt, the deal will total $78 billion.

The deal combines the largest U.S. drugstore chain with the third-biggest health insurer, rolling Aetna's health insurance business with CVS's drug plans and retail operations. In doing so, it may herd some of Aetna's 22 million customers into CVS drugstores when they fill a prescription through CVS's drug plans. It will also give Aetna's insurance plans a closer on-the-ground tie to where customers get care.

The deal will be financed with a mix of cash and debt. Barclays, Goldman Sachs Group and Bank of America have committed to provide $49 billion of financing, the person said. It's expected to close in the second half of 2018 and create cost savings of about $750 million, said the person.

After the deal closes, Aetna will operate as a separate unit run by members of the current management, the person said. Aetna CEO Mark Bertolini will join the CVS board, along with two other Aetna directors.

Amazon lurks

It comes as the health sector is looking over the horizon at Amazon, and how the company could shake up the business of buying, distributing and selling drugs and medical products if it gets into health care. The retail industry has been battered by the online giant. Amazon hasn't revealed its plans.

"One of the problems with the health-care system is it's so fragmented and there's so little coordination," says Steve Kraus, who invests in health firms at Bessemer Venture Partners. "A better vertically integrated less-siloed system is a good thing in my mind."

It could also set off a new round of takeovers as CVS and Aetna's competitors look at the reshaped landscape. On Nov. 30, Express Scripts' top executive said the company would be open to a deal at the right price, though wasn't actively looking for one.

"We don't need to sell to be very successful in the future, but we are always open to others who may all of sudden conclude they want what we have," Express Scripts CEO Tim Wentworth said in an interview. He also mentioned the possibility of partnering with Amazon on a drug distribution arrangement.

More deals?

Express Scripts is just one company in a universe of independent drug plans, insurers and supply-chain middlemen. WellCare Health Plans, Humana and Centene could become merger targets after the CVS-Aetna deal, according to Matthew Borsch, an analyst at BMO Capital Markets. Drug distributors like Cardinal Health or McKesson, and retailers such as Walgreens Boots Alliance could also face pressure to find partners.

CVS, which operates about 9,700 retail stores and 1,100 walk-in medical clinics, has been moving beyond it drugstore roots for years. In 2007, it bought pharmacy-benefits manager Caremark Rx—a business that made up almost half of the Woonsocket, Rhode Island-based company's operating profit in the third quarter. In 2014, CVS stopped selling cigarettes and added "Health" to its name.

"Aetna has emphasized its desire to move care closer to the consumer," Brian Tanquilut, an analyst at Jefferies, said on Oct. 26. "CVS's capabilities, including Minute Clinic and the Coram home infusion business, could enable the health plan to improve health outcomes and reduce cost trend."

Potential obstacle

Consolidation is picking up among health-care suppliers and administrators, as insurers seek more control over how their consumers get care. But two proposed megamergers among insurers—including a deal between Aetna and Humana—were blocked this year on antitrust grounds, leading the companies to look beyond rival insurers to different types of health-care companies for potential deals.

The CVS-Aetna deal antitrust prospects may depend on which U.S. regulator is tasked with reviewing it, according to Bloomberg Intelligence analyst Jennifer Rie. The Federal Trade Commission has been less critical of consolidation among companies in adjacent businesses, known as vertical consolidation. The Justice Department, on the other hand, last month sued to block the merger of AT&T and Time Warner, a vertical deal.

Michael Newshel, an analyst at Evercore ISI, said the effort to block the AT&T-Time Warner deal does raises concerns but a CVS-Aetna deal does have a path forward. Aetna would likely need to divest some or all of its Medicare drug plan business, he said.

The biggest U.S. health insurer, UnitedHealth Group, is also the most diversified. United owns doctor clinics and an outpatient surgery chain, and also has a pharmacy-benefits management, called OptumRx, built on the acquisition of Catamaran Corp. in 2015.

-- Bloomberg News

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