A drug chain and a pharmacy giant CVS has agreed to acquire the nation’s third-largest health insurer Aetna for $207 per share or $69 billion.
This would be the biggest deal of the year and the first tie-up of a retailer, an insurer and a pharmacy benefit manager in history. As such, the proposed deal would change the landscape of healthcare business as well as streamline and cut costs in the drug supply chain (read: Top-Ranked ETFs in Focus on Rumored CVS-Aetna Deal).
Inside The Deal
Under the terms of the deal, Aetna shareholders will receive $145.00 per share in cash and 0.8378 CVS Health shares for each Aetna share. Upon closure, Aetna shareholders will own approximately 22% of the combined company and CVS Health shareholders will own approximately 78%.
The merged company would create a one-stop shop for customers’ healthcare needs, ranging from employer healthcare and government plans to managing benefits and running drug stores. By owning Aetna, CVS will become the first triple healthcare player: a drugstore, a pharmacy benefit manager and now an insurer. It would be in a better position to negotiate discounts with drug manufacturers. This is because CVS is one of the key players in the pharmacy benefit management business in the United States and often negotiates drug benefits for insurance plans and employers (see: all the Healthcare ETFs here).
Additionally, the combined company could pose a bigger threat to UnitedHealth Group Inc. (UNH – Free Report) , the largest U.S. health insurer having its own pharmacy benefits unit. The move is also to stave off threats from Amazon.com Inc (AMZN – Free Report) , which is making huge expansion in the world of pharmaceutical drugs and has already received pharmacy-wholesaler licenses in a dozen states.
The transaction would result in cost synergies of $750 million and low-to-mid single-digit accretion to earnings in the second full year after the transaction closes. It is expected to close in the second half of 2018 and is subject to approval from shareholders of both companies and anti-trust regulatory approvals. Including the assumption of Aetna’s debt, the total value of the transaction is $77 billion.
However, the transaction is expected to attract high antitrust scrutiny because of its sheer size and overlaps in Medicare Part D — a government program to subsidize prescription drug costs. Notably, CVS has a market capitalization of $76.1 billion while AET has a market cap of $59.1 billion. As such, the approval of the transaction might call for certain divestitures of Medicare prescription drug contracts.
The announced merger has put the spotlight on a few healthcare and consumer ETFs that could be the best ways for investors to tap the opportunity arising from the CVS-AET deal.
This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 45 securities in its basket with Aetna occupying the third position, accounting for 7.4% share. The fund has amassed $486.3 million in its asset base while volume is light at about 26,000 shares per day on average. It charges 44 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
The fund targets companies that have the potential to outperform the broad U.S. consumer staples sector and tracks the MSCI USA Consumer Staples Diversified Multiple-Factor Capped Index. Holding 28 stocks in its basket, CVS Health takes the sixth spot, accounting for 6.1% of the portfolio. In terms of industrial exposure, more than half of the portfolio is dominated by food beverage tobacco while household and personal product and food & staples retailing take the remainder with a double-digit exposure each. This ETF has attracted $2.6 million in its asset base and trades in a meager volume of about 500 shares. It charges 35 bps in fees per year and currently has a Zacks ETF Rank of 5 (Strong Sell).
This fund offers exposure to the general merchandise stores by tracking the Dynamic Retail Intellidex Index. In total, the product holds 30 securities with CVS taking the fourth spot at 5% of assets. In terms of industrial exposure, specialty retail takes the top spot at 35%, while drug stores (13%), hypermarkets (13%) and food retail (11%) round off the top three positions. The fund has accumulated just $14.5 million in its asset base and charges 63 bps in fees per year. Average daily volume is paltry at 2,000 shares. The ETF carries a Zacks ETF Rank #2 (Buy), with a Medium risk outlook (read: Best ETFs & Stocks From November’s Top Sector).
This fund provides exposure to the 26 largest retail firms by tracking the MVIS US Listed Retail 25 Index. Of these, CVS takes the ninth position with 4.2% share. The ETF has a certain tilt toward specialty retail, which accounts for 32% of the portfolio, while Internet direct marketing (22%), hypermarkets (12%), departmental stores (10%), and healthcare services (8%) round off the next four spots. The product has amassed $60 million in its asset base and charges 35 bps in annual fees. Volume is light as it exchanges around 13,000 shares per day. RTH has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Should You Buy Retail ETFs Now?).
The iShares U.S. Healthcare Providers ETF (IHF) was unchanged in premarket trading Tuesday. Year-to-date, IHF has gained 23.34%, versus a 19.26% rise in the benchmark S&P 500 index during the same period.
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