CVS, Aetna Lead a Potential Big-Deal Parade

The fourth quarter, and the month of December in particular, are usually busy times for mergers and acquisitions, and often when big deals are announced. With one month to go in Q4:17, the pace may be picking up. Deal volume through December 1 stood at 231 transactions (-39% to last year’s 379), and $19.6 billion (-49% vs. $38.6 billion in Q4:16). But late on December 3, CVS Health (NYSE: CVS) and managed care giant Aetna (NYSE: AET) announced their $69 billion merger. More mega-deals are in the offing. Possibly.

The CVS/Aetna deal was first reported in October by The Wall Street Journal, with talk of $200 to $205 per share for Aetna. The final price is $207 per share in cash and stock: $145 in cash and $62 in stock.

Besides being the biggest deal announced in 2017 (or 2016, even), the combination portends major changes in the U.S. healthcare market. But that’s for another day. We have healthcare deals to cover.

A major retailer/pharmacy benefit manager hooking up with a managed care organization was unheard of, until October. Now, we may see a similar deal in 2018. Humana (NYSE: HUM), stirred the speculation pot in late November. The company filed a Change in Control 8-K on November 22, effective January 1, 2018, that changes the cash compensation and benefits of all executives reporting to the President and CEO Bruce Broussard, in the event of a take-out.

Leerink analyst Ana Gupta rushed out with a note saying that Cigna (NYSE: CI) was the most likely acquirer, although Wal-Mart (NYSE: WMT) or Walgreens Boots Alliance (NYSE: WBA) could be preparing to follow CVS’ example. With a market cap of $39.9 billion, Humana wouldn’t come cheap. It’s failed 2015 deal with Aetna had a $37 billion price tag, when its share price sat at $182 on July 1, 2015. Today, its share price hovers around $258.

If Cigna proves to be the acquirer, more managed care deals would follow. To avoid antitrust concerns (a major problem for intra-sector deals), the company would likely have to divest its Health Sprint Medicare Advantage assets to other MCOs, including Aetna, WellCare Health Plans (NYSE: WCG) and Anthem (NYSE: ANTM).

Humana’s explanation for the filing was that it was just cleaning up some company policies that hadn’t been amended since 2011. Its severance policy had not been amended since 1999. The changes were just to align the compensation and benefits with market practices. We’ll see.

In the pharmacy sector, RBC Capital Markets analyst Randall Stanicky sees a break-up as beneficial to Allergan (NYSE: AGN). The timing is serendipitous, since the company assumed the Allergan name when its predecessor, Dublin-based Actavis plc (NYSE: ACT), announced its acquisition of the U.S. drug maker for $66 billion in November 2015.

Stanicky says Allergan’s women’s health unit, with approximately $1 billion in revenue, could bring billions with the right bidders. He says former Actavis/Allergan CEO Paul Bisaro, now head of Impax Laboratories, Inc., has expressed interest.

This comes on the heels of Teva Pharmaceutical Industries‘ (NYSE: TEVA) break-up of its women’s health division in September 2017. The drug maker realized nearly $2.5 billion from the sale of its Paradard® intrauterine copper contraceptive to CooperSurgical Inc. (NYSE: COO) for $1.1 billion, the sale of a global portfolio of women’s health products to CVC Capital Partners for $703 million, and the rights to its emergency contraception brands to Foundation Consumer Healthcare, LLC for $675 million.

Then there are the activist shareholders, usually hedge funds or private equity, which are awash in cash. They’ve been active in the Hospital sector for some time, and their influence has spurred a plethora of divestitures. There’s a new crop in the Physician Medical Group sector, as Elliott Management Corp. is now targeting MEDNAX Inc. (NYSE: MD), a steady acquirer of pediatric, anesthesia and radiology practices with a market cap of $4.7 billion.

Elliott disclosed a 7% stake in the company, and several private equity firms have expressed interest in MEDNAX, according to a Reuters exclusive on December 1.  Bank of America Corp. is working with MEDNAX to field the interested parties, which include Carlyle Group LP (NASDAQ: CG).

Carlyle is also kicking the tires on Envision Healthcare Corp. (NYSE: EVHC), the surviving entity of the $6.7 billion merger between AmSurg Corp. and Envision Healthcare Holdings announced in June 2016.  A group including the Canadian acquirer Onex Corp. (TSE: ONEX) has also expressed interest in Envision (market cap $4.7 billion). According to Bloomberg in mid-November, Onex has formed a consortium with Clayton Dubilier & Rice and Hellman & Friedman to bid for Envision.

A lot of noise, but just a little action, so far. That’s how this game is played, after all. We’re waiting for the other shoe to drop on the Republicans’ tax change bill, which may come by the end of the year. If it does, Katie, bar the door. We’ll be busy in 2018.

 

 

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