One of the biggest frustrations for companies pursuing mega-mergers is the regulatory approval process. It is long. It is cumbersome. And for CVS Health Corp., that could be a blessing.
CVS, the pharmacy chain based in Woonsocket, Rhode Island and pharmaceutical benefits manager, is said to be on the verge of an Aetna Inc. acquisition of $ 66 billion. ., a health insurer based one and a half hours away in Hartford, Connecticut. When the talks were initially reported in October, badysts and investors were hesitant since CVS has no experience in operating a large insurer. But the strategic logic is not so blatant, as Max Nisen of Gadfly explained here, and the transaction is long enough for an ad to even arrive on Monday.
Still, there is a big question to be answered: CVS, how do you plan to pay exactly for this monstrous deal?
No matter how you cut it, mathematics is fragile. A long review by antitrust regulators could be just what CVS needs to buy time and thus strengthen its overall balance and make the figures work better.
Bloomberg News, citing a person familiar with the negotiations, reported that CVS will likely pay at least $ 200 per share to Aetna, with more than 30 percent of its offer in cash. The Wall Street Journal is receiving between $ 200 and $ 205 an action comprising mainly cash.
Assume the lower end of the range, $ 200 per share, and without synergies (anyway, there will not be many): With 35 percent cash, the agreement seems quite dilutive, potentially reducing the earnings per share of the next year at 8 percent, according to data compiled by Bloomberg. CVS shareholders will not like that. On the positive side, CVS's net debt would increase to 3 times the 12-month accumulated Ebitda of the companies, which is high but still manageable. As of the last quarter, its index was around 2.
Aetna shares closed at a historic high on Thursday, and an offer of $ 200 per share (or more) is almost as good as what will be obtained in the short term. That is why Aetna's shareholders are going to demand more cash and "minimize exposure to the integration and execution risk badociated with CVS paper," as Leerink Partners badyst Ana Gupte put it in a report. I mean, that is not a good sign that the investors of your objective do not believe enough in the merger to want a meaningful participation in it. But CVS has few other opportunities, so the cash consideration is likely to increase to make the deal.
The problem is that, for example, with 55 percent of cash, the net leverage would rise to an ugly ratio of 3.8. Currently, both S & P Global Ratings and Moody & s Investors Service rated CVS three levels above the trash, but a biased offer towards cash would likely result in rebates.
There has been no successful merger of health insurance of this magnitude. In fact, two major mergers of the industry, one involving Aetna, were dissolved on Valentine's Day earlier this year. Cigna Corp. canceled its sale to Anthem Inc., and Aetna and Humana Inc. withdrew their own deal. That lets us use WellPoint's much smaller acquisition of Anthem in 2004 as a guide, an agreement that took 401 days to close. In addition, with a political focus on health insurance and drug prices this year, regulators are likely to take a look at CVS-Aetna.
During that time, companies could use their strong free cash flow to accumulate cash, which "could be used to reduce debt later, especially if stock buybacks are stopped," wrote Carol Levenson, badyst at GimmeCredit, in a note on Thursday, at the end of the bad news for shareholders at the end.
Transactions that are deceptive to invent tend to have the most uncertain destinations. CVS is paying a premium for an action that is already at a high level and is taking a ton of debt to enter a completely different line of business. That said, his Caremark purchase a decade ago was another ready-to-use deal, and now that unit represents more than 60 percent of CVS's revenue.
But the fact that we are even talking about how the government The bureaucracy could help CVS to make this agreement more financially feasible. He tells me that Aetna shareholders would be justified in demanding as much cash in advance as they can.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.