If all goes as planned, Tuesday’s quarterly earnings report from health insurer Aetna Inc (NYSE:AET) will be its last. In early December, drugstore chain CVS Health Corp (NYSE:CVS) made an acquisition offer AET shareholders couldn’t turn down. And though it still has regulatory hurdles to clear, neither company seems to see any delay on the horizon.
In the grand scheme of things, it’s “just another merger” within the healthcare arena.
There have been several of them lately, including deals between rival drugstore chains Walgreens Boots Alliance Inc (NASDAQ:WBA) and Rite Aid Corporation (NYSE:RAD), as well as deals that involved several hospital chains. Humana Inc (NYSE:HUM) was involved in a handful of negotiations, too. It is the new normal, driven more so by necessity than the need for profit growth.
And yet, the pairing of CVS and Aetna is “the one to watch” going forward. It’s positioned to lead the charge of change within the healthcare arena.
Mixed Feelings for AET
As a refresher, CVS made an offer of $69 billion to acquire Aetna. The world’s biggest drugstore chain specifically offered AET owners $145 in cash and $62 worth of CVS shares for every outstanding share of Aetna stock. Factoring in Aetna’s debt that CVS will be assuming, the deal is ultimately worth $78 billion.
Each of the companies’ chief executives were optimistic (obviously) about the pairing, pointing out that the evolution of the nation’s healthcare industry — which is increasingly competitive — has made this union a prudent one. At the very least, the deal is expected to save $750 million per year in expenses, but more than that, it gives each company access to the other’s customers.
It won’t be a completely seamless transition, though. Gabelli Funds portfolio manager Jeff Jonas, who likes the idea, still conceded: “Financially, though, it’s really a stretch.” He noted that CVS will be taking on more debt to facilitate the deal.
Leerink analyst Ana Gupte is also concerned this melding of two related-but-different organizations could spook CVS’s current partners. She explains, “We have heard that Optum Rx may be pitching business to (other national health insurer) Anthem, and expect that other Health Plans contracting with CVS could also be at risk.”
All the pessimistic points are well taken. On balance though, there’s still more upside than downside to AET shareholders who are choosing to hold onto their position through the impending swap for cash and CVS shares.
AET Deal’s Glass Is Half Full
Just to avoid the risk of any uncertainty, Aetna and CVS teaming up makes CVS stock worth owning.
It’s admittedly self-serving for CVS CEO Larry Merlo to suggest that current caregivers “lack … the element of convenience and coordination.” He also added, “When we talk about this unmet need, that’s really the unmet need that we’re filling.”
The thing is, he’s not the only one saying it. Moody’s Vice President Mickey Chadha also commented that the impending deal “could in time lower the overall health care costs for consumers.” Chadha went on to say:
“This is particularly important as a relatively small percentage of patients with certain chronic illnesses or intense medical needs account for a disproportionately high percentage of health care costs.”
Both gentleman are correct.
Aetna’s CEO Mark Bertolini further fleshes out the matter with some specifics, pointing out:
“The overuse of emergency department adds an estimated $38 billion in wasteful spending every year, so tremendous savings can be realized by utilizing local care solutions in a more integrated fashion.”
AET Deal Hits Nail on Head
And that’s the key: integration. CVS will be operating just over 1,100 clinics that deliver care that’s more in tune with consumers’ actual needs. These clinics will have doctor-office attention to minor ailments but at a speed greater than offices and ERs can usually give.
At the same time, with an insurer and a PBM working together with the kind of reach the combined company will have, it will be able to use its clout in a manner that rewards more outpatient procedures and acts as a disincentive to costly, longer-term inpatient stays.
Other mergers and agreements have danced all around this idea, and clearly major surgeries won’t be done at CVS pharmacies. But, the Aetna-CVS deal finally hits the nail of actual consumer need directly on the head.
Bottom Line for AET Stock
It’s not a reason to buy AET shares if you don’t already have them. In fact, it may be easier to not own Aetna stock.
If the deal gets the regulatory green light, your broker may charge you a reorganization fee. And there’s often a transition period as AET shares are replaced by CVS shares and cash in your account. There may also be tax implications with the intended acquisition.
All the same, if you’ve been a long-term owner of AET stock and haven’t been entirely sure you want to own the hybrid that Aetna and CVS will become, this is a scenario where the whole will be greater than the sum of its parts.
Other companies in the industry will likely follow this lead, but being first to any market is half the battle.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.