Update: Cigna Shareholders appear notably disappointed by this so-called "defensive deal," slamming the shares down over 10% (as ESRX jumps 12%). We note the combined market cap of the companies is modestly lower now - after the announcement...
Some have suggested that Cigna's weakness is a removal of an acquisition premium based on hope that Amazon might have taken them out (prior to this deal).
A “defensive deal” may surprise and disappoint the Street, wrote JPMorgan's Gary Taylor. Like CVS Health Corp.’s pending acquisition of the insurer Aetna Inc., Taylor sees the value but questions if it’s “worth the squeeze” for added debt for Cigna. The deal would leave Anthem to stand alone among the big five health insurers without an owned and integrated pharmacy benefit manager.
* * *
In the latest sign that investors are seeing a replay of the health-care consolidation wave from 2015, Bloomfield, Conn. health insurer Cigna Corp. is reportedly nearing a deal to buy Express Scripts Holdings Co., a pharmacy benefit manager, after Express last year lost its biggest client when Anthem said it would set up its own pharmacy benefits management unit after accusing Express Scripts of overcharging it by millions of dollars.
Cigna has reportedly agreed to pay $67 billion for Express, according to the Wall Street Journal.
Express Scripts shareholders will receive $48.75 in cash and 0.2434 shares in the combined company for each Express Scripts share they own - representing a 31% premium to Express's Wednesday closing price of $73.42.
Pharmacy benefit managers serve as middlemen who help negotiate discounts with drug makers. Late last year, CVS Health Corp. agreed to buy Aetna for $70 billion, the catalyst for this week's massive bond offering - the largest corporate bond sale in more than two years and - at a rumored $4 billion - the third largest bond deal ever behind Verizon's $49 billion issuance in 2013 to fund its buyout of Vodafone's stake. Investors are reportedly jockeying to get a piece of the deal and are expected to pay a not-insubstantial "liquidity premium". Repayment dates range from about two years to 30 years.
On Tuesday, S&P downgraded CVS to "BBB" from "BBB+," outlook stable, and removed ratings from watch negative, citing the company’s expected risk profile following the issuance of senior unsecured notes to partly fund the purchase of health insurance provider Aetna Inc.
After the 2015 consolidation wave was largely thwarted by regulators (a proposed merger between Cigna and Anthem ended in acrimony, with the companies suing each other over the terms of the deal).
Aside from the CVS deal for Aetna, Albertsons Cos recently agreed to buy the rest of Rite Aid Corp. after most of the chain was bought by Walgreens. The deal is also happening as Amazon has begun to take steps to become a competitor in the health-care equipment distribution, stoking fears that its ambitions could stretch further.
* * *
In the pre-market, Express Scripts shares are up around 20% and Cigna down around 6%...