A new CVS/Aetna entity will be a healthcare services behemoth, but we think CVS is overpaying to create it.
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announced a merger of operations with CVS purchasing all of Aetna’s outstanding equity and taking control of the new healthcare services entity. The firms announced they expect the deal to close during the second half of 2018 barring any major regulatory issues. With this combination, the new CVS/Aetna healthcare services firm will fundamentally change how healthcare will be provided to individuals.
Vishnu Lekraj is a senior equity analyst for Morningstar.
We view this transaction as a positive from an operational standpoint and believe the new entity will be one of the most powerful players within the healthcare ecosystem. Ultimately, we view a new CVS/Aetna entity as a healthcare services behemoth with the infrastructure to sell insurance and manage/treat members through every aspect of their healthcare treatment regimens.
Nevertheless, we are concerned CVS has significantly overpaid for Aetna as we believe the $207 per share price is rich when compared with our $104 standalone fair value for the health insurer. From our perspective, CVS potentially runs the risk of material shareholder value destruction if this deal is not executed optimally and if it is unable to drive synergies beyond cost savings.
On the other side, we believe Aetna has done a great job with obtaining a price that will add significant value to its shareholders. Accordingly, we plan to raise our Aetna fair value to $181 as we have assigned a 75% probability weighting the deal will close with little regulatory pushback.
We plan to further evaluate the exact impact on CVS’ fair value; however, we expect there will be at least a slight reduction to its fair value. We also plan to maintain our wide moat rating for CVS and narrow moat rating for Aetna, but we will evaluate the moat rating for the new entity as we analyze the potential operating model, strategy, product structure, and economic profit impact.
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