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Why CVS Health Is Sinking Today

By Brian Feroldi – Dec 4, 2017 at 3:54PM

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Shares fall after the company announces the details of its mega-merger deal with Aetna.

What happened

Shares of CVS Health (CVS -2.74%) fell as much as 6.5% on Monday after news broke that the company has officially reached a deal to acquire health insurance giant Aetna (AET)

Business people shaking hands and smiling

Image source: Getty Images.

So what

Here are the must-know terms of the deal:

  • The acquisition values Aetna at $69 billion, or $207 per share. That represents a 14% premium to the stock's closing price on Friday.
  • CVS plans on using cash and stock to fund the transaction. Aetna's shareholders will receive $145 in cash and 0.8378 shares of CVS Health for each share of Aetna that they own.  
  • CVS Health plans on funding the cash portion of the deal with cash on hand and $49 billion in confirmed financing commitments.   
  • Both companies' boards have unanimously approved the deal.
  • Aetna shareholders will own approximately 22% of the newly combined entity.
  • The deal is expected to close in the second half of 2018. 

Why is CVS Health making this move? Here is the rationale that it's using to get its shareholders excited:

  • The combined company would offer an "unmatched suite of services" that could improve the quality of care and lower costs.
  • The business would be extremely well diversified and benefit from "strong and stable cash flows."
  • $750 million in synergies could be realized in the second full year.
  • The deal would be accretive to earnings in the second year, with little impact on profits in year one. 

On the flip side, management also said that this deal would significantly increase the company's debt load. As a result, CVS Health said that its top priority after the deal closes is to pay down its debt. To accomplish that, the company said that it would suspend its share repurchase program and keep its dividend flat.

CVS Health's downward movement today suggests that Wall Street doesn't share management's enthusiasm for this deal. What's more, Aetna's stock is also falling today and is currently trading at a steep discount to the buyout price. That suggests that traders don't believe that this deal will ever see the light of day.

Now what

While this deal received the unanimous thumbs up from both companies' boards, its closing is far from a sure thing. Recent history shows that regulators are not afraid to take action when necessary. Also, this acquisition will likely result in mass layoffs if approved. That might not sit well with the Trump administration.

For what it is worth, CVS Health's management seemed confident that this deal would close without too much trouble since there isn't a lot of overlap between the two businesses.

Will the government ultimately give this takeover the green light? While anything could happen, I hard a hard time seeing it closing in its current format. Count me as a skeptic.

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.

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