CVS swallows dubious extra $8 billion to gain volume

View of a CVS pharmacy in Manhattan, New York, U.S., November 15, 2021. REUTERS/Andrew Kelly

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NEW YORK, Sept 6 (Reuters Breakingviews) – CVS Health (CVS.N) is using a questionable approach to better health. Pharmacy owner and health insurer Aetna has disclosed plans to buy Signify Health for $8 billion, a deal that could generate more market power and profit. Regulators, however, may have a less favorable diagnosis and the valuation is inflated.

Limited competition and rising treatment spending has allowed US health insurance giants to raise premiums and squeeze other parts of the system to improve their own bottom line. UnitedHealth (UNH.N), the $500 billion industry juggernaut and the first to fully embrace buying and expanding into other parts of the healthcare chain, from doctors to data analysis, has delivered a total shareholder return of more than 1,000% over the past decade, quadrupling what the S&P 500 Index has delivered over the same period.

Signify will help CVS grow in size while providing other benefits as the largest provider of in-home patient assessments. Clinicians who make home visits can spot untreated issues and help manage chronic conditions. And the collected data can identify patient patterns to save money.

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CVS could also link this with its in-store clinics. Spotting diabetes and getting patients to take medication, for example, is cheaper than ignoring the disease and the resulting hospital visits.

Still, CVS is paying 28 times Signify’s estimated 2023 EBITDA for this M&A treatment, according to Refinitiv figures. To say that there would eventually be a high single-digit return on invested capital as synergies are realized is not exactly comforting. This is only a modest return, based on cost savings and increased revenue that may not be realized.

Additionally, more than a third of Signify’s revenue comes from Aetna’s rivals Humana (HUM.N) and UnitedHealth, according to analysts at Cowen. Although insurers purchase services from each other, it is potentially risky in this case to put valuable patient information in the hands of a competitor.

Finally, US antitrust authorities are adopting new and tougher positions. They filed a lawsuit to block UnitedHealth’s acquisition of Change Healthcare, noting concerns about transactions “at the intersection of healthcare and data.”

CVS Chief Financial Officer Shawn Guertin said Tuesday that its acquisition strategy was never going to be “one and done.” Swallowing this Signify supplement and others, however, could be an unhealthy way to bulk up.

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CVS Health said Sept. 5 that it had agreed to buy Signify Health for $30.50 per share, or approximately $7.6 billion in equity and approximately $400 million in equity appreciation rights. , net debt and expenses. The home health services company debuted on the stock exchange in February 2021 at $24 per share.

Private equity funds affiliated with New Mountain Capital, which own about 60% of Signify’s common stock, said they would vote in favor of the deal.

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Editing by Jeffrey Goldfarb and Amanda Gomez

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