In this Market Foolery podcast, host Chris Hill is joined by Industry Focus: Healthcare host Kristine Harjes to dissect why CVS's (NYSE:CVS) offer to purchase health insurer Aetna (NYSE:AET) for $69 billion is no sure thing, and also to consider the latest on much-troubled meal-kit company Blue Apron (NYSE:APRN), which recently sent its CEO packing, but (silver lining) got an upgrade Monday from Barclays that goosed its stock price by double-digit percentages.
A full transcript follows the video.
This video was recorded on Dec. 4, 2017.
Chris Hill: It's Monday, Dec. 4. Welcome to Market Foolery. I'm Chris Hill. Joining me in studio, it's the host of Industry Focus, one of the hosts of Industry Focus, Kristine Harjes. Thanks for being here!
Kristine Harjes: Thanks for having me, Chris!
Hill: The news fairy showed up on Sunday, as some of you might have seen, in the form of a massive healthcare deal: CVS buying Aetna for the tidy sum of $69 billion. And that's why the host of the Healthcare edition of Industry Focus is in the studio with me. There's a lot to get to with this deal, so let me start with this. When you saw the news, what was the first thing that went through your mind?
Harjes: I was like, "Oh, that, finally!" [laughs]
Hill: It has been -- I was going to say rumored, but it has been reported for weeks now that these two have been talking.
Harjes: Yeah, these details are not really that surprising at all. Even the fact that CVS is looking to do a deal like this is not surprising at all. We've known for a while now that management's looking at 2017 as a rebuilding year for CVS, and they have pretty heavily foreshadowed that an acquisition was going to come at some point. So here it is.
Hill: So who is excited about this deal? At the moment, shares of CVS are down a little bit, shares of Aetna essentially flat. We've seen plenty of mergers and acquisitions, smaller than this, in 2017 where both stocks are up. It's viewed by investors as a win-win. So who's excited about this deal?
Harjes: Maybe some traders looking to make a quick buck. If you look at shares of Aetna, they are down pretty substantially below the buyout price that's been announced. Aetna is trading for about $184 right now. But the buyout is for $207 per share. So if you think this is going to go through, you can make a nice 10% or so. But that huge arbitrage opportunity is so indicative that people don't think this is going to go through. It remains to be seen, but there are a lot of big hang-ups surrounding it.
Hill: So from a regulatory standpoint, people don't think this is going to go through?
Hill: I get that the resulting company would be massive, but these are not two businesses that really have a ton of overlap.
Harjes: Yeah, which I think makes this really interesting. There's a lot of skepticism about it, but it's a vertical-natured organization where you have Aetna, which is an insurer, and you have CVS, which has the retail pharmacies that we all know and maybe love, and they also have the PBM side, which is your pharmacy benefits manager, and that works with Aetna, but that's pretty much the extent of the overlap between these two industries. There's a little bit here and there, but by and large, they are two very different companies, and they're not competitors with each other, which usually, when you see antitrust come through and block a merger, it's because it would be too big; it would cause prices to go up because there isn't enough competition.
But the whole point of this, if you listen to management, anyway, is to bring costs down. So if you believe them, maybe it wouldn't be blocked. But you also look at some other similar mergers that haven't gone through as easily. Consider AT&T and Time Warner. Those are two very different companies, too. They're not competitors. It's a content company and a content distributor. So, again, in a similar line of industry. They're not your typical antitrust case, but yet the DoE sued to block it.
Hill: So I have to believe that, among the businesses that are probably going to make their opinion known, if not publicly, certainly quietly, to regulators against this deal, I'm assuming UnitedHealth (NYSE:UNH) is one, because the resulting company here would, I don't want to say it would dwarf UnitedHealth -- it wouldn't -- but it would surpass UnitedHealth, which is currently the largest insurer in the U.S. I would put Walgreens on that list, too. If I'm Walgreens, I'm probably terrified at this deal.
Harjes: Yes and no. It depends on what you think the result is going to be of the merger. They claim that they're going to have a ton of synergies and they're going to be able to leverage all this data and have a stickier relationship with different customers. I don't know if I really buy it. For example, there's been a lot of talk about how now, when you go into the walk-in clinics at CVS, you can get somebody that's very hands-on who can take care of you, and on your way out you'll be able to pick up your prescriptions and also pick up some of the other things that CVS sells in the front end of the store, and as an Aetna customer, you'll be incentivized to do that. But I currently have UnitedHealthcare insurance, and I can go to these clinics and I'm covered. So I'm not really sure why I might be even more incentivized. Maybe I get an extra discount at CVS stores? I don't know. Unless there's a reason why UnitedHealthcare's patients wouldn't want to go to these Minute Clinics, I don't get why UNH would be against this deal.
Hill: So let's, for the sake of argument, assume that the pessimists are right, that this deal gets blocked. Do you anticipate CVS going after another smaller insurance company? They're clearly looking to buy someone. So is it absolutely going to be another insurer? Or where do they go if this gets blocked? I realize it's a crystal-ball question.
Harjes: That is definitely asking me to peer into a murky, at best, type crystal ball. I don't know. CVS is clearly pretty afraid of the Amazon (NASDAQ:AMZN) potential threat. I mean, who isn't? Amazon is a threat to pretty much all companies out there, particularly ones that have a retail footprint. So CVS is looking to find a way to guarantee that their retail stores succeed. Unless they want to divest themselves of their stores and just go the PBM route, or maybe do a mail-order pharmacy-slash-drugstore that ships things to you Amazon-style, they're going to have to find a way to make their walk-in stores more appealing to people. And how exactly they would go about doing that, whether it would be via a merger or not, I'm not really sure.
Hill: On Wednesday's episode of Industry Focus, safe to say you'll be talking about this, at least a little bit? Or is this checking that box for you?
Harjes: We'll see. I'll definitely point listeners to this episode, but we actually covered this pretty extensively on the show a few weeks ago, when the rumors first started circulating. We'll see what Todd thinks, my usual co-host.
Hill: Shares of Blue Apron up 20% this morning after getting an upgrade from Barclays. That must have been one hell of an upgrade, because 20%? This is a stock that went public in June, and then in the last few days, co-founder Matt Salzberg, who was the CEO, stepped down at the end of last week, and Brad Dickerson, who's the chief financial officer, he's going to be the new CEO at Blue Apron. Do you want any part of this stock? Even with the upgrade, I don't know. I've been reading some stuff this morning, both about Blue Apron but also about HelloFresh, which is doing a ton of advertising, and we can delve into whether or not any of these businesses are going to succeed. It's not like I look at Blue Apron and think, "They're not operating the right way, but HelloFresh, they have the right model." I'm a little skeptical of the business model in general.
Harjes: Yeah, this company has positioned itself as something that's going to be appealing to the mass market, and that's just not true. There are definitely people who will want Blue Apron who are willing to pay a premium for it -- because let's face it, it's a fairly expensive product. But I just don't see them ever reaching every single home. A larger problem with this kind of business model to begin with is, customers don't often stick around. You get a lot of people that try the service, they do it for a couple of months and then they get sick of it, or maybe they go to a competitor because the competitors are offering a discount for new members. So there's this endless churn of always needing to acquire new members. And as you get farther and farther from your low-hanging fruit, your easy core demographic, that gets more and more expensive, and that's so apparent in this business model, that they're spending so much money to acquire new people. And that's only going to get more difficult.
Hill: Yeah. Customer acquisition cost is one of those metrics that is so important and I feel like doesn't necessarily get as much attention as it should, just because it applies to so many businesses. It's not just membership businesses like this, but even just credit cards. I remember 15-20 years ago, when the idea of negotiating your monthly credit card fee started to gain some traction. And once you dug into, why would a credit card company openly negotiate with a customer, "OK, yeah, we'll lower your fee a little bit," it's because once you find out what the customer acquisition costs are for credit card companies, you realize, right, it's so much better for them to just make existing customers happy rather than trying to go get new ones.
Harjes: Yeah. I think, if Blue Apron wants to succeed, that's the route they need to go. They need to figure out how to keep these customers that come into their ecosystem, and squeeze out more money from them. And I don't see them being able to do that with a huge pool of people. I think, if they're going to succeed, it's going to have to be from a fairly small base that's willing to pay up for some luxury products.
Hill: Is alcohol a solution here, do you think, at all?
Harjes: It's always a solution.
Hill: [laughs] No. I meant, I don't know if Blue Apron sells alcohol, but we've talked plenty of times about what a wonderful, high-margin business that is. And if they could partner with some wine delivery companies?
Harjes: Those exist. I think it's called Drizly. It's an alcohol delivery app. I get their little postcards in my mailbox all the time.
Harjes: I think that's what it's called. It has to end in -ly in order to be a new tech company.
Hill: [laughs] Yeah, I think that's a federal law.
A couple of housekeeping notes before we get to our final story. First, we're hiring here at The Motley Fool. We're hiring analysts and editors and tech positions. Check out careers.fool.com to see some of the positions that we're hiring for. And because if you listeners have emailed into ask, we have not yet posted the listings for summer interns. I do expect that to come before the end of the month. But it's not up there yet, so hang in there. Thank you to Dan Cumine, thank you to Dan in Wisconsin for sending the Peppered Suede candle from Bath & Body Works. Yes, as Bill Barker and I were discussing the other day, we lit the candle. I haven't lit here in the studio, because I think Dan Boyd would come through the glass and knock me unconscious, and rightfully so, because I don't think we're supposed to light candles in the studio. But you thought the name fit the scent of the candle.
Harjes: I mean, I thought I had a very earthly scent vibe to it, so, sure.
Hill: Last Friday, the candle arrived -- I probably shouldn't say this. You know what? I don't think anyone from the company that owns our building is listening. So yeah, we lit the candle down on the second floor. A powerful scent, a pleasing scent, but the consensus was, among people that I talked to, it kind of smells somewhere between men's cologne and deodorant.
Harjes: Which, once you say that, I don't disagree.
Hill: Yeah. Anyway, thank you to Dan for sending the Peppered Suede candle. Last but not least, a reminder that this Friday, we're going to be taping Motley Fool Money at Chatter, which is a restaurant in Washington D.C., Northwest D.C., 5247 Wisconsin Ave. We're going to be taping at around 11:30 in the morning at Chatter, so come on by. We would love to see you. I'm going to be there. Dan Boyd is going to be there. A whole bunch of people are going to be there from the Fool, and we'd love to see you. And yes, of course we're going to hang out after the taping. I don't know what you're doing on Friday, because you live in the District of Columbia.
Harjes: I do.
Hill: Maybe you could do a little work from home in the morning and then come hang out at Chatter in the afternoon for a bite to eat and possibly a beverage.
Harjes: I'm thinking about it.
Hill: Today is National Cookie Day. How are you planning to celebrate National Cookie Day?
Harjes: I'm probably going to try to run in the opposite direction, but I'll definitely fail.
Hill: [laughs] And I don't know the origin of this. I don't know why it's necessarily in December, but it is a month when I do a fair amount of baking of cookies, and I'm certainly not the only one. There are a lot of people baking cookies. Although, as you and I were discussing earlier today, the number of freshly baked cookies in our office has dwindled over the last 12 months or so, maybe a little bit more, 12 to 18 months.
Harjes: And as you mentioned, we're now hiring, so make sure that you list that on your resume.
Hill: Look, if you can't connect those dots, people, there's not much more that Kristine and I can do for you. But yeah, a few of our colleagues who did a fair amount of baking of cookies are no longer working here at Fool HQ, so that has caused that to go down. Do you have a favorite holiday cookie that you go for?
Harjes: Holiday-specific, hmm. So, when I was little --
Hill: Sorry to interrupt, can we just agree, chocolate chip is the gold standard right there for baked goods?
Harjes: That's a staple, yeah. There's a lot of variability within it. You get the gooey kind, the crunchy kind, it's all good. So when we were little, my best friend would hold a holiday decorating party. So just the plain sugar cookies that are in all the different shapes, and they would have heaps and heaps of different things to decorate them with. It was a huge mess. I don't know why her parents let us do this year after year, but it was amazing. So I think the soft part of me in my heart still loves those cookies because of those memories.
Hill: Do you remember anything that you made? Do you remember any specific decoration?
Harjes: I do. There was this girl we were friends with as we were growing up, and this guy had a crush on her. We were in first grade. And of course, by the nature of being in first grade, she found this appalling, so she wanted to make him an evil cookie. So she got a cookie and put all those red hot spicy beads on it and covered it up with icing so he wouldn't be able to tell.
Hill: Oh, wow!
Harjes: And she gave it to him. [laughs]
Hill: That is diabolical.
Harjes: It's cruel. First graders, man.
Hill: That's a dark side. Much respect to the first grader. I feel like Evil Cookie is a brand that would fill a niche somewhere. I'm not really sure where.
Harjes: I could see that. It would be like those letters that you mail to people, and they open it up and it's just glitter.
Harjes: Have you heard of those? That's a thing.
Hill: Yeah, glitter bomb, sure. So, for me, at the holidays, there's a very basic cookie that my father referred to as an adult cookie. They're basically just a spiced shortbread cookie called Saint Nicholas cookies. I'm baking them later this week for Saint Nicholas Day, which is the 6th, Dec. 6.
Harjes: Will they be around for the taping on Friday?
Hill: I think they'll be in the office before that. I think they'll be in the office on Thursday.
Harjes: So you're not going to use them to bribe our listeners?
Hill: I'm bribing our listeners with, we're going to be at a restaurant where they sell food and alcohol in exchange for money. I don't know how much more I can do. Plus, Dan Boyd.
Harjes: OK, that is the best bribe there is. [laughs]
Hill: Food, beverages, and Dan Boyd. Chatter, this Friday. Kristine Harjes, you can check her out every Wednesday on Industry Focus, the other daily podcast here at The Motley Fool. You can listen to the other episodes, too, but definitely check out Wednesday, the Healthcare edition. Thanks so much for being here.
Harjes: Thanks, Chris.
Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Kristine Harjes has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends CVS Health, Time Warner, and UnitedHealth Group. The Motley Fool has a disclosure policy.