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CVS Health to acquire Aetna for $69 billion in year's largest acquisition

Reuters 

By Carl O'Donnell and Caroline Humer

(Reuters) - U.S. drugstore chain operator Corp said on Sunday it had agreed to acquire U.S. insurer Inc for $69 billion, seeking to tackle soaring healthcare spending through lower-cost medical services in pharmacies.

This year's largest corporate will combine one of the nation's largest pharmacy benefits managers (PBMs) and pharmacy operators with one of its oldest insurers, whose national business ranges from employer healthcare to government plans.

The deal comes after Aetna's $37 billion plan to acquire smaller U.S. insurance peer Humana Inc was blocked in January by U.S. federal judge over antitrust concerns. proposed combination of peers Anthem Inc and Cigna Corp was also shot down.

shareholders stand to receive $207 per share in the deal with CVS, the companies said. The consideration comprises $145 per share in cash and 0.8378 shares for each share. first reported the terms of the deal earlier on Sunday.

shareholders will own about 22 percent of the combined company, while shareholders will own the remainder.

The companies said that cost synergies in the second full year after the transaction closes -- 2020 if the deal closes in the second half of 2018 as they expect -- would amount to $750 million. They foresee it adding to adjusted earnings per share by the low- to mid-single digit percentage points.

Their vision expands beyond capitalizing on CVS' existing MinuteClinic structure, which largely offers preventative services like flu shots, the companies' chief executives said in an interview.

"When you walk into there's the pharmacy. What if there's vision and audiology center, and perhaps nutritionist, and some sort of care manager?" CEO Larry Merlo said.

will be operated as separate unit and Aetna's existing leadership is expected to run the businesses, Merlo said. will have two of its directors, in addition to CEO Mark Bertolini join the board of

The deal comes as healthcare payers and pharmacies are responding to shifting landscape, including changes in the Affordable Care Act, rising drug prices and the threat of competition from online retailers such as Amazon.com Inc.

plans to use its low-cost clinics to provide medical services to Aetna's roughly 23 million medical members. In addition to clinics and medical equipment, could provide assistance with vision, hearing and nutrition.

combined insurer and PBM will also likely be better placed to negotiate lower drug prices, and the arrangement could boost sales for CVS's front-of-store retail business.

The company expects to invest billions of dollars in the coming years to add clinics and services, largely financed by diverting funds away from other planned investments.

That could eventually cut costs substantially, with the clinics serving as an alternative to more expensive hospital emergency room visits.

Meanwhile, deeper collaboration between Aetna's insurance business and CVS's PBM division could drive down drug costs by adding clients and boosting the PBM's leverage with drugmakers.

Independent PBMs have long been criticized for potential conflicts of interest with insurance company clients, because they could potentially keep cost savings from drug negotiations rather than passing them on to patients.

insurers meanwhile have sought to cut costs amid steep prescription drug price rises and requirements to care for even the sickest patients under the Affordable Care Act.

Large corporate customers of are taking wait-and-see attitude regarding the impact on costs, benefits experts have said.

Analysts have said the CVS-deal could prompt other healthcare sector mega-mergers, as rivals scramble to emulate the strategy.

It could spur merger between Walgreens Boots Alliance Inc and Humana Inc, or between Humana and Wal-Mart Stores Inc, Ana Gupte, analyst at Leerink Partners, said recently.

VERTICAL MERGER

Although and Aetna's planned merger does not directly consolidate the insurance or pharmaceutical industries, the U.S. Department of Justice has been taking closer look at so-called vertical mergers, where the companies are not direct competitors.

Last month, the Justice Department sued to block AT&T Inc's planned $85.4 billion merger with Time Warner Inc, saying the integration of content producer with distributor could reduce consumer choice.

The CVS-deal could attract similar scrutiny if regulators feared it could block customers from frequenting other pharmacies or contracting with other PBMs, several investors said, asking not to be named because they were not authorized to talk to the press.

But four antitrust experts said there is little doubt the deal will be approved, although it might need to meet conditions to convince antitrust enforcers to sign off.

It is unclear whether it would be evaluated by the U.S. Federal Trade Commission or the Justice Department but that decision might be made based on which agency is less busy, said Matthew Cantor of law firm Constantine Cannon.

"(The companies) want the FTC to get it. The reason that the FTC is better at this point is that the Justice Department has just broken with decades of precedent of how to deal with vertical mergers," said Cantor, referring to the decision to refuse conduct remedies and file lawsuit to stop AT&T Inc from buying Time Warner Inc.

Barclays and Goldman Sachs served as financial advisers to CVS, and Centerview Partners also provided financial advice to CVS's board. Shearman & Sterling LLP, Dechert LLP, and McDermott Will & Emery LLP were legal advisers to

Lazard Ltd and Allen & Company LLC were financial advisers to and Evercore served as independent financial adviser to Aetna's board. Davis Polk & Wardwell LLP was Aetna's legal adviser.

(Reporting by Carl O'Donnell and Carl Humer in New York; Additional reporting by Greg Roumeliotis in New York and Diane Bartz in Washington; Editing by Meredith Mazzilli and Lisa Shumaker)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, December 04 2017. 10:06 IST
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