CVS Health, an American retail pharmacy and healthcare company agreed to acquire the American health insurer Aetna for $67.5 Bn with the aim to tackle soaring healthcare spending through lower-cost medical services. The transaction is expected to generate significant synergies for shareholders and benefits for customers.
In addition to an operator of 9,700 retail pharmacies, CVS Health is also a pharmacy benefit manager (PBM) with more than 90 million plan members. A PBM acts as the middleman between insurance companies, pharmacies and manufacturers to secure lower drug costs for patients and insurers by negotiating discounts from drug prices.
Aetna operates as a healthcare benefits and insurance company in three segments: Health Care, Group Insurance and Large Case Pensions. It serves more than 45 million people.
The deal is a response to a shifting landscape in the healthcare industry: an uncertainty around the changes in the Affordable Care Act, insurers facing pressure to lower medical costs and traditional retailers threatened by new competitors, including the increasingly powerful and disruptive Amazon. The online retailer has already secured licenses to sell prescription drugs in 12 states and plans to further penetrate the healthcare market.
Merger benefits are expected to stem from a collaboration between CVS’s PBM division and Aetna’s insurance business that could lower drug costs by adding clients and thus increasing the leverage to negotiate better prices with drug makers.
In addition, the merger would save millions of dollars annually through the MinuteClinic service CVS is providing at more than 1,000 locations. MinuteClinic are low-cost walk-in clinics for preventive care and minor illness treatment. After the deal is complete, Aetna as an insurer could start providing care directly and steer customers to its own doctors, nurses and pharmacists working at CVS locations, limiting higher-cost doctor visits for chronic illnesses and expensive hospital emergency room visits.
As online competitors are getting traction, CVS’s MinuteClinic could be key to driving more foot traffic into CVS’s pharmacies and boost retail revenue.
The transaction is expected to be accretive, slightly increasing CVS’s EPS. The companies are anticipating cost synergies amounting to $750 M in the second year after completion. The deal is valued at $77 Bn, including debt. Aetna shareholders would receive $207 per share of which $145 in cash and $62 in shares (0.8378 CVS shares for each Aetna share), ending up owning about 22% of the combined entity.
Despite being a vertical merger, the transaction could attract regulators’ scrutiny on grounds that collaboration between the two companies might block Aetna customers from visiting other pharmacies or contracting with other PBMs.
Transaction closing, which is subject to antitrust approval, is expected in the second half of 2018.
