Analysis: A CVS-Aetna Merger Would Be Revolutionary

Health care investors were blindsided on Thursday afternoon when Dow Jones reported that CVS Health Corp CVS is exploring a $66 billion bid for Aetna Inc AET. As expected, Wall Street analysts have a lot to say about the potential deal.

In a new note on Friday, Citigroup analyst Alvin Concepcion said a marriage between CVS and Aetna makes sense in principle as the health care industry prepares for a major new competitor in Amazon.com, Inc. AMZN.

“In sum, we see this potential deal as both evolutionary and revolutionary given the dynamic healthcare environment and push toward consumerism coupled with a challenged retail backdrop and the need to combat a looming AMZN threat,” Concepcion said.

A $66 billion deal would be a tough pill for the $73 billion CVS to swallow.

At roughly $200 per share, Concepcion says the price for the potential deal is reasonable. That price represents 12.4x Aetna’a trailing 12-month EBITDA, which is within the range of the valuations of previous CVS acquisitions Caremark (11.8x) and Omnicare (22.0x).

However, Concepcion said CVS has a lot to gain from the potentially difficult deal. He estimates that the buyout could contribute an additional $0.24 in EPS for CVS within a year of completion. In addition, the two companies could leverage the power of their combined data to gain additional insights about customers.

Customers themselves could also be winners from the merger, benefitting from potentially lower pharmacy prices.

Citi has a Neutral rating and $87 price target for CVS stock.

Editor's note: On Dec. 1, Dow Jones reported CVS will acquire Aetna for $145 per share in cash, plus $62 in CVS stock.

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