Last night CVS announced a definitive agreement to acquire Aetna (a Health Insurance Company), for $207/share, financed by 30% new equity and 70% new debt ($45B)/cash on hand. The transaction is expected to close mid-2018. This deal greatly increases CVS’s pro forma leverage to 4.6x (current 2.9x). In order to deleverage quickly, CVS will stop its share buyback program and maintain its dividend flat, until the leverage ratio goes down to low 3x, which I expect to happen within the 2 years post deal. The synergies seen by the management team are currently at $750M in the second year of the deal, which should create EPS accretion in the low to mid-single digit range.
Interestingly enough, Aetna is still trading 13% below CVS’s offer price, which I believe is due to investors fearing a rejection of the deal by the anti-trust authorities.
We are still reviewing the impact of this deal on our investment thesis and price target. We like the long term play in healthcare and its defensive attributes, and appreciate CVS’s strategy to play a greater role in the healthcare space, thus increasing its moat.