Tag / Merger

by Frank Maduri

Gray Area: The CVS – Aetna Merger

The area of mergers and acquisitions is a key area of focus here on Frank’s Forum and that is what makes the CVS pursuit of purchasing and consolidating Aetna such significant news. The merger would be the largest transaction of 2017 (and we have had some tremendous M&A activity this year) and the largest health insurance merger in American history.

The price tag is astounding: under the terms of the current proposal CVS would obtain Aetna for $66 billion. The implications are of tremendous concern for several entities: health insurers, PBMs (Pharmacy Benefit Managers), other pharmacy retailers, drug companies, and most importantly: the consumer.

The potential combination of the second-largest retail drug chain and one of the largest health insurance providers in the nation is an alarming proposition. It has a feeling of a conflict of interest written all over it. The mainstream media and some other internet based news outlets have done an amazing job covering this emerging story and I encourage you to check out some of those related articles.

The thought process within some of the coverage in those outlets also corresponded with my first thoughts on this merger due to my understanding of the pharmaceutical network coverages through major insurance providers: higher costs for the consumer. This merger, should it clear all of the hurdles, would have tremendous implications on cost.

The consumer should have reservations because essentially this merger will translate to being given the following options: use a CVS location to fill your prescriptions for medications or use CVS mail order service for your prescriptions or end up paying a significant amount of additional money using a different option.

The retail brick and mortar locations of CVS are ubiquitous in certain areas of the country, but there will be some cases geographically where finding a CVS will be cumbersome for some consumers. That is a concern right off the top for the consumer.

The proposal clearly benefits CVS in providing them with a captive audience of consumers also has the ancillary benefit of fixing an issue most retailers are experiencing: reduced foot traffic in their stores.

Many retailers are dealing with reduced foot traffic due to a variety of factors, most notably the convenience of online shopping. This is a good segue to another driving force behind the CVS – Aetna proposed merger which is Amazon.

The online retail giant has been exploring for several weeks now whether to enter the prescription drug marketplace. Amazon has already been granted some preliminary licenses within this area, but I am not an expert on licensing requirements for prescription drug carriage across multiple states, for more information in that area I would suggest researching some of the great articles out there on the topic.

The industry experts insist that the hurdles for entry into the market are high for Amazon to attain. The ethical and procedural questions from a compliance standpoint will most certainly follow this new strategic direction for Amazon.

In addition, the recent legal changes to the policies regarding the dispensing of painkillers and opioid class narcotic drugs would be of particular scrutiny. The ramifications of Amazon carrying those types of products could potentially increase the rate of prescription drug addiction which the government is trying to curtail. Amazon has the two components needed to make this ultimately work: smart people and tons of money.

The convenience of filling your blood pressure medication from your Amazon Echo, your tablet, or your computer is enticing to some, and frightening to others. The “Amazon effect” has already impacted traditional retail channels, especially with their recent entry into the grocery channel with the purchase of Whole Foods, but where does it stop? Should Amazon be able to access prescription drug channels?

However, the case for a conflict of interest could also be made for CVS and Aetna. The merger of health insurance carriers and retail pharmacy chains also has been met with apprehension by some consumers as well. This type of arrangement essentially forces the consumer to use a particular pharmacy if they have insurance coverage from their job which is, in this case, through Aetna.

In fair balance, the other side of the argument would be made by those who have no problem with this merger by pointing out that many current arrangements are made between health insurance carriers, PBMs, and retail pharmacy chains. Some insurance carriers or their PBMs have relationships with Rite Aid, some with Walgreens, and some with CVS which create a “preferred provider” type of situation.

The implications for CVS to actually be the same company as Aetna run far deeper than just a strategic partnership. The potential for an approved bid for CVS to merge with Aetna, would have a domino effect on the retail drug business segment.

The nature of these situations and their impact on an industry segment would invariably begin the speculation of other similar potential mergers. Some examples could be Walgreens with United Health Group, Rite Aid with United or another smaller insurance carrier, and Jewel/Osco with Blue Cross Blue Shield.

The ramifications of a CVS merger with Aetna could change the way health insurance and prescription drug coverage is currently set up, it would have a dramatic impact on prescription formulary coverage, and result in potentially higher costs for the consumer.

The potential for Amazon to enter the prescription drug space is a whole other topic for debate on the potential for a wide range of potential ways that those products could be misallocated or abused.

The merger potential for the second largest retail pharmacy chains with one of the largest health insurance carriers compared to the largest online retailer getting involved in dispensing medications: in the words of the rock legend, Tom Petty, “I don’t know which one is worse”.

by Frank Maduri

“Straight Talk” T-Mobile & Sprint Merger Talks Intensify

The reports out of Wall Street on Tuesday were that two wireless telecommunications giants, T-Mobile and Sprint, were in negotiations on a potential merger. The reporting from CNBC has been great on this topic, and according to that trusted news source, there has been no exchange ratio determined to this point.

That is an indication that talks are still in an early stage but CNBC also added that the negotiations on the term sheet had begun. The period of term sheet negotiations can lag for a while or move relatively quickly depending on the parties involved in the potential merger. I have covered mergers where the meetings to figure out the parameters of the term sheet could get contentious, obviously much of that is centered around the valuation of given assets in the deal.

These two particular companies have discussed joining forces at least a few times in the past several years. The difference between those prior attempts and this potential merger opportunity is that the current proposal is expected to be an all stock transaction. The prior attempts at merging the two companies involved cash which brings in other variables around valuations of certain other operational components.

The main reason that these two mobile phone service providers are seeking to merge is one of the usual reasons: cost synergy. That rationale has come up often in my prior writing on M&A activity, and this deal stands to provide billions of dollars of cost savings due to the synergies involved in these businesses.

T-Mobile and their parent company, Deutsche Telecom, would become the lead party in the combined company. This translates to the average person to mean that if the two companies did link up – the combined company would be known as T-Mobile. It is too early to know, and it is unclear whether it will change, that they will keep the two names in the marketplace operating essentially as different brands with the same parent owner.

Sprint and their parent company, Softbank, expressed interest to work a deal with T-Mobile again earlier this year. The sources around the negotiations state that the understanding is that the CEO of T-Mobile, John Legere, would lead the combined company.

However, it is also being reported that the top guy at Softbank, Masayoshi Sun, wants a position of significant input into the daily operations of the potential combined entity. This scenario, in my experience covering mergers, always presents a whole other set of complications to the deal being completed.

In addition, it should be noted that the personnel involved in researching this type of transaction at T-Mobile has not begun their review of the balance sheet at Sprint. This review could (and very often does) change the terms of the structure of the deal. It also could become a factor in T-Mobile backing out of the process if it is determined that the current financial picture at Sprint is not advantageous for M&A activity.

Furthermore, the other variable which cannot be underscored is the anti-trust situation. The regulatory aspect from the federal government entities involved in a merger of this magnitude can frequently create several hurdles that could sidetrack a potential deal to the point that it never materializes.

In this case, we are dealing with a significant alignment of the third largest and fourth largest mobile telecommunication companies in the United States. The scrutiny from the federal anti-trust regulatory authorities is going to be significant. That level of scrutiny usually causes one side of the potential merger to disband the process. The possibility that T-Mobile could bow to the pressure exerted by federal regulators and pull the plug on this deal is one potential outcome of this situation.

The motivating factor for both T-Mobile and Sprint is a common one: remain competitive with the top two players in the industry, Verizon and AT&T. Those two behemoths keep getting larger and more diversified in their holdings with Verizon recently acquiring Yahoo and AT&T obtaining more media companies to go along with their blockbuster merger with DirecTV.

The pricing, network coverage, and service options (AT&T bundles services with DirecTV packages, Verizon bundles cell phone plans with FIOS TV packages) makes for competitive disadvantages for T-Mobile and Sprint. It is my belief that if T-Mobile and Sprint joined forces that the branding message would be crafted around their focus on mobile devices and the fact that they are not involved in other businesses in media.

It is very early in the process for this potential merger, anything could break one way or another with regard to the probability of it being carried to fruition. The fact remains that beyond all the “straight talk” the companies are engaging in at this point with the term sheet, is that this merger has several boundaries to overcome.

The stock valuations on the term sheet, the fact that both holding companies do not totally own all of the companies they are trying to consolidate, the role of John Legere versus Mr. Sun and his “seat at the table” demands, the balance sheet health of Sprint, and the anti-trust pressures; are all factors that could derail this deal off the tracks at any point.

The average consumer should keep tabs on this merger because it could further limit the competition and the competitive balance in the cell phone marketplace. This could lead to unfair or burdensome cost increases to the consumer and a lack of choice in their carrier. It effects an area that hits close to home to a great majority of the American public: their cell phone.

In the end analysis, it is going to come down to the same set of factors that most M&A activity revolves around: is the cost savings from the synergies obtained from consolidation worth the effort, headache, and manpower hours needed to complete the merger. The next few months will provide many of those answers as T-Mobile and Sprint move forward in this long process that merits the attention of the consumer.

by Frank Maduri

The Next Chapter For Rite Aid or Is it the Last Chapter?

The past few years have featured some major mergers and consolidations across a variety of business segments. It is rare to have a proposed “mega merger” result in a change of course, but in the case of the Walgreens deal to merge with Rite Aid in the retail pharmacy space, that is exactly what transpired.

Walgreens, after repeated attempts to find ways to satisfy the anti-trust regulators, announced that they had disbanded their pursuit of a merger with Rite Aid. The most recent proposed framework of the acquisition had Walgreens and Rite Aid both selling store locations to a Southeastern based retail drug store and discount store chain, Fred’s, done in pieces through a series of transactions.

The proposed framework left regulators and industry analysts concerned that Fred’s could essentially double the size of their company overnight and not sustain any major setbacks.

The proposal also left many in the government regulatory positions feeling unsettled with the potential size of the combined Walgreens/Rite Aid chain and the impact that could have on the consumer. The combined entity would also have tremendous influence with pharmaceutical distributors regarding price and other factors, which made interested parties in the pharmaceutical area very concerned as well.

In the end analysis, Walgreens determined that it was no longer a viable pathway to grow their business, and the proposal with Rite Aid was terminated. The transactions with Fred’s never took place, and the whole deal fell apart very rapidly. The natural next question is: what is the next step for Rite Aid?

Rite Aid has sustained five straight losing quarters and their stock has lost a significant amount of value. They will receive $35 million from Walgreens in a termination fee because the merger was scuttled. Rite Aid also announced it will sell about half of their store locations in their current business footprint. Many of those stores will be sold to Walgreens, which is a strange turn of events because regulators were concerned about Walgreens getting bigger if the merger was approved.

Walgreens stands to gain more store locations in certain markets because the merger was scrapped. Some investment analysts maintain that Rite Aid could turn their business around because they will have streamlined their operations to focus on just half the amount of store locations than they have in their current footprint once the sale of the store locations becomes final.

Conversely, some investment analysts and industry experts are concerned that Rite Aid has serious issues and that the company will still fail, despite the efforts to streamline their business operations. The sale of some of these locations will relieve some of the debt load for Rite Aid, but they still have some significant hurdles to overcome.

The strategic decision by Rite Aid to sell all their locations in certain marketplaces will certainly help the company to remain focused on their core customer bases in the Northeast and along parts of the East Coast. The distribution systems should improve in this streamlined approach, and the distribution network will be far more targeted which will also provide cost savings.

Rite Aid is a staple brand in the retail drug store channel, especially in the Northeast. The future of the company is reliant upon their marketing efforts to reconnect with their core customer base in that geographic market. They will also face external pressures from much larger competitors such as CVS/Caremark, Wal-Mart, and Walgreens.

The opportunity for Rite Aid to merge with another competitor is still a possibility, but the best opportunity for their brand was to merge with Walgreens. It is going to be difficult to find another partner that would not want to just swallow them whole, and the other chains are essentially too small to make an impact on their competitive position in the industry segment.

The decision to streamline their operation will, at the very least, buy them some time to reevaluate their options. The next chapter for Rite Aid appears to be a return to their roots, and to focus on their key strategic markets in the Northeast. It remains to be seen if this change in strategy can be enough to bring the company out of the slump that they have been mired in for several months.

It remains to be seen if this next chapter is the last chapter for yet another iconic American brand in an increasingly competitive retail landscape.

by Frank Maduri

Merger News: Discovery Purchases Scripps Networks

During the past four years here on Frank’s Forum I have focused on mergers in the business world, television ratings/business side of television, and news that impacts the consumer. The news on a Monday morning that Discovery purchased Scripps Networks combines elements from all three of those sub-themes.

First, the merger itself is worth over $11 billion and will combine the networks under the Discovery umbrella (Animal Planet, TLC, Discovery, ID network, and a stake in the OWN Network) with that of the Scripps portfolio (HGTV, Food Network, DIY Network, and Travel Channel). This merger will give the new Discovery Communications ownership of about 20% of the “basic cable” landscape.

This will provide them with leverage when negotiating carriage rights with the cable and satellite providers because they will have much more content and be able to split the channels up into different packages to promote to those providers in order to attract new customers.

Second, the ratings side is a big component of this deal as well. The ratings for basic cable programs are held to a different metric than the national broadcast or premium cable programs, but ratings are still crucial. This is made even more significant by the decreasing viewership levels for cable television programs due to the large number of consumers cancelling their cable service.

The ratings for certain programs that air on Scripps channels are significant, and the combination of the two entities helps their overall combined ratings compared to if they remained two separate units. The reality series, Fixer Upper on HGTV is the #2 rated overall cable program, so that is a huge addition to the Discovery Networks stable when the time comes for contract renewals with the cable and satellite providers.

This ties in nicely to the third component: the impact for the consumer. The combined Discovery/Scripps unit will now be able to offer more content and more value to the cable /satellite providers. They will also be offering their channels in different bundle packages which will benefit the consumer. These factors should lead to lower costs to the consumer for those particular channels.

The additional benefit will most likely be that the content from the new Discovery Networks combined entity will become more readily available in the “On Demand” functions of your cable or satellite provider.

The last component which impacts both the consumer and the business side of the television landscape is that the Discovery executives have discussed the development of their own streaming application. The proposed application would feature a range of content from this newly formed group of popular cable channels.

However, some industry experts remain skeptical of Discovery creating their own streaming service application because it is expensive to develop properly. Many of those same experts also counter that the combined Discovery/Scripps is going to cost more to operate because it is going to be a larger company with more expenses. That is going to require some adjustments by the senior management structure to run efficiently.

In the end, the merger of Discovery with Scripps Networks is an indication of the direction that those types of media companies are going to take in the future. The trend toward consolidation is going to be a necessity in order to compete with NBCUniversal (Comcast), Disney/ABC, and AT&T (DirecTV) especially with AT&T set to purchase Time Warner.

The management at both Discovery and Scripps knew that in order to survive in this new world order in cable television they had to combine forces. The increase in streaming content and consumers trending toward “cutting the cord” with cable services is going to further consolidate the industry in the years ahead. The landscape will change and only the strong will survive.

This merger should have a few benefits to the consumer especially if Discovery could get a streaming application launched. The changes will continue and how it will all turn out in the end is anyone’s guess, we will all just have to stay tuned, literally.

by Frank Maduri

Mergers & Acquisitions Roundup

The mergers and acquisitions (M&A) activity in this quarter was slow compared to the two most recent quarters in the financial world. The total amount of the deals was reportedly higher in dollar volume than the prior quarter, but the overall M&A picture is overshadowed by the unknown impact of new antitrust policies coming from Washington.

Those policies remain unrevealed to the public by the White House, and has placed most of the potential M&A activity on hold until further details emerge. However, amid all those changes some pending deals made progress and others fell apart. The past few months were still busy when it came to consolidations and other types of acquisitions.

Amazon Enters The Grocery Aisle

Amazon made a bold move into the retail grocery channel by acquiring Whole Foods in an all cash deal in June. The deal will give Amazon a foothold into an industry they have been trying to tap into for a long time without having to spend major capital on leasing or building store locations, training management and staff, as well as developing a distribution network specifically for those stores.

The addition of Whole Foods is going to make Amazon an even greater threat to the other players in the fresh grocery business segment. Amazon plans on keeping Whole Foods operational strategies mostly intact with retaining their business headquarters in Austin and keeping the brick and mortar store experience largely the same.

Walgreens Proposed Merger With Rite Aid Shelved

In the opposite direction, the M&A area was dealt a blow when Walgreens and Rite Aid announced that their long-pursued foray into merging together was being abandoned completely.

This proposed marriage of two of the largest retail pharmacy chains in the U.S. was riddled with issues from the outset. The regulatory boards involved have consistently been concerned with the fact that Walgreens and Rite Aid both had to divest a certain number of stores to meet antitrust requirements. This was further complicated because the industry contains a lack of suitable buyers for those locations.

Walgreens/ Rite Aid identified Fred’s, a largely Southeastern U.S. based chain of both pharmacies and discount type dollar stores, as the partner to absorb the locations that they both would have to sell off in order to meet approval on the merger. The regulators were not sure that Fred’s could double in size basically overnight and survive, especially expanding into the Northeast and other areas where they had no previous presence.

The sheer potential size of a combined Walgreens and Rite Aid ultimately doomed this proposed M&A transaction. Walgreens now has to determine another consolidation strategy in order to compete with CVS Caremark. Rite Aid, while pretty healthy overall with their business, has to be concerned about the tough competition from CVS and Walgreens in the Northeast. They also have to be concerned that another company is going to try to obtain them and absorb them in the short term.

The Big Get Bigger

In perhaps the most under the radar move of the year, AT&T is poised to become even bigger than they are currently with a proposed $85 billion acquisition of Time Warner. This is not just the cable television unit of Time Warner, this is the entire company.

This merger is expected, according to analysts close to the deal, to close and meet all final approval metrics within the next 60 days. This is a controversial merger in the eyes of many in the general public who have justifiable concerns about a multimedia conglomerate with that much influence.

AT&T and DirecTV are the same company, and they will now have control over broadcast channels such as TBS, TNT, CNN, and HLN. This represents a monopoly which can exert pressure upon advertisers and control the message in the media in a way that could be very dangerous.

Some consumers will feel that this is a conflict of interest with AT&T controlling a major satellite television platform as well as a full stable of broadcast channels.

New Rules Coming Soon

The White House will announce some sort of new rules for M&A activity that could make it potentially easier to consummate some of these mega deals. The Dow – DuPont merger looks like it is going to meet regulatory approval regardless of these future changes to the antitrust regulatory requirements.

The rules could allow for less oversight of potential monopolistic deals and could lead to a road where all the consumer is left with are very small “mom & pop” type stores or a store owned by some giant conglomerate with nothing in between.

The Dow-DuPont merger would be one of the largest in history and would be a very complex deal that would eventually create a corporate structure with separate divisions running as autonomous companies based on their shared specialty.

The analysts expect that the Dow-DuPont approval coupled with the regulatory changes could create conditions where M&A activity will ramp up significantly.

The “Q” Gobbles Up HSN

Liberty Interactive/QVC announced on Thursday that they have purchased the remaining stake in HSN (Home Shopping Network) to complete the acquisition of the network. QVC, or “the Q” as it is known in shopping circles, now has control of their top competitor, HSN, and the company is touting the cost savings from the shared core synergies for both networks.

It stands to reason that the systems for ordering and shipping will be upgraded to a unified platform. The knock on HSN is that the ordering process could be more cumbersome and the return process more complicated than that of the processes used by QVC. An improvement to any of those processes at HSN would be a real win for the consumer. This deal is also an indication of how robust the online competition from Amazon and other sites have been to the sales for twenty-four-hour home shopping networks.

Those networks, QVC and HSN respectively, were the advent of online shopping. They provided the first convenience factor of shopping from home, before the genesis of eBay, Amazon, and Craig’s List. Some feel that this merger could be seen as a monopoly, but the reality is that it is a necessary move for the survival of home shopping networks amid intense marketplace competition.

Berkshire Bets Big On Electricity

Berkshire Hathaway and their high-profile owner, Warren Buffet, announced on Friday that they have purchased Oncor, a Texas based power grid leader, for $9 billion in cash.

The acquisition is one of the largest that Berkshire Hathaway has ever undertaken. They are intrigued by the steady demand for electricity and the continued importance of electricity infrastructure in the future.

This move also pulls Oncor out of bankruptcy and into a stable of other companies and brands owned by Berkshire which could provide opportunities for strategic partnerships in energy delivery in the future.

Europe Cracks Down

The news on Thursday that the E.U. has reviewed the M&A activity of certain major players and decided to take punitive steps came as a surprise to some, and as no surprise to others within the business world.

The E.U. is investigating whether GE mislead their regulatory compliance process when the consumer products giant purchased a wind farming operation. The line of defense for GE, according to their spokespeople, is that the company did nothing to intentionally misguide the process. The E.U. law is written in a way that GE should they be found guilty of any wrongdoing would have to pay a fine in excess of one billion dollars.

The E.U. is also investigating Merck (the German company not the American pharmaceutical titan) for a similar matter in a completed merger where the valuations might have been altered to mislead the regulatory powers involved. They also face a hefty fine and the potential for an increased level of scrutiny whenever they decide to consolidate in the future.

The E.U. is also investigating electronics giant, Canon, for some alleged deceptive practices during their purchase of Toshiba’s medical imaging business unit. It would not reverse the acquisition, but it would be a significant fine if guilt is established. The reputation and corporate image of Canon could also take a hit in this situation as well.

The M&A activity has been largely put on hold in recent months. However, some of the largest merger activity could become reality in the next few months. These transactions will have an undeniable impact on the average consumer and will have influence over entire industry segments moving forward. It is important to understand how they can impact you and your family from the way it can impact costs of goods and services. The future will bring more of the same, so stay prepared.

by Frank Maduri

Follow Up: Anthem Merger Bid For Cigna Is Scuttled

A federal appeals court upheld the earlier decision of a lower court regarding the proposed merger of two of the largest healthcare insurance providers: Anthem and Cigna. The court opinion cited concerns about cost impacts to the consumer and the lack of competition in the healthcare insurance marketplace as the main issues with the proposed deal.

The backlash against this proposed marriage of two of the top three largest insurance providers had reached a critical mass in recent days. The pressure came from a variety of interested parties within the healthcare industry as well as from consumer interest groups.

The situation is further complicated because Anthem and Cigna are currently in a lawsuit against one another regarding that “breakup fee” clause that I detailed in my earlier coverage of this proposed mega-deal. The clause entails that Anthem pays Cigna $1.85 billion if this merger was to be derailed and not come to fruition.

Cigna is suing Anthem demanding payment of the fee. Anthem is counter-suing trying to force Cigna to stay in the merger deal. The resistance from several states and the federal government caused Cigna to look for ways to exit the deal. This situation has grown ugly very quickly, and the legal team for Anthem seems undeterred by this ruling. They are insisting they are going to find a way to gain approval for this merger.

Anthem and their legal team can spin this any way they would like, and they have 1.8 billion reasons why they are looking to pursue this merger. The reality is that the proposal is all but scuttled. The appeals court decision today affirms that and should be viewed as an indication that this proposal should be abandoned.
The lawsuits are another whole matter that is entirely separate and could take several different routes throughout that convoluted process. The regulatory reviews from the different government agencies ultimately had concerns about pricing and the monopolistic impact that the merger would have on consumer choice.

The combined Anthem/Cigna also would have been a major player in the provision of healthcare insurance to the business community. The potential influence on pricing and the subsequent effect that would have on the employee/employer splits on cost sharing for company provided healthcare coverage was a huge issue for certain states as well as the U.S. Court of Appeals.

This development comes just a few months after the Aetna – Humana proposed merger also collapsed during the review process. These mergers are the direct result of the consolidation route to optimize efficiency and maintain profitability during healthcare market changes due to the Affordable Care Act.

It should be noted that the proposed new healthcare plan changes are not fully known at this time, so the exact impact on the market is also unclear. The relentless pursuit of greed by these corporations in the healthcare industry is at the center of this particular situation.

The future of the Anthem/ Cigna proposed merger from the judicial perspective is either a “challenge” ruling on this verdict, which means that they can re-appeal this decision from the federal court. The other option is to attempt to take the case to the U.S. Supreme Court and see if they are granted a writ of certiorari to move that proceeding forward.

Some industry analysts and media types feel that a writ of certiorari is unlikely in this situation. The component that makes a Supreme Court review possible is the money involved with two companies of this size and the high powered legal representation that is involved in this case. It should be interesting to see how Anthem plans to move forward because they have the most at stake with the breakup clause taken under consideration.

The merger, for all intents and purposes, is opposed by about a dozen states and the federal court system as well as the regulatory bodies involved. This creates conditions where it is unlikely that it moves forward. The court ruling today cited this decision under the framework that it is a victory for the consumer because of the potential impact on pricing the combined entity could have exerted.

In my view, from covering mergers, I am not a proponent of monopolies. I also have learned that the bigger the merger in size, the more combustible it is when it becomes unraveled. This proposal is setback significantly, but it is not over yet. Anthem will not go quietly into the night paying a fee to Cigna, and Cigna is going to want the money from Anthem based on the agreement they had in place. It is going to get ugly in the weeks ahead, but most likely these two companies will be going toe-to-toe and not on their way to a monopoly styled merger.

by Frank Maduri

Call Waiting: Verizon Back Peddles On Merger Rumors

The news out of Verizon on Thursday is that the comments made by their CEO, Lowell McAdam, were taken out of context regarding a potential merger involving the telecommunications giant.

The CFO of Verizon, Matthew Ellis, attempted on Thursday to clarify earlier remarks made by Mr. McAdam to the media. Those comments alluded to a potential merger of Verizon with Disney, Comcast, or CBS.

However, Mr. Ellis today offered a different explanation in stating that Mr. McAdam was answering a question about whether or not he would “take a call” from Disney, Comcast, or CBS. The comments are now being walked back by Verizon, today they clarified that they would be open to strategic partnerships with those entities and not an actual merger.

This clarifying statement from Verizon comes after several financial news sources ran with a story that Verizon was exploring a merger, and the stock prices of those three entities involved: Disney, Comcast, and CBS all saw increased trading activity.

It is no secret that Verizon is looking to grow certain aspects of their business, the acquisition recently of Yahoo is proof of that strategy. The senior management at Verizon have steered away from obtaining other large media companies, which is unlike their other competitors in this space. The deal between AT&T and DirecTV jumps to mind as the type of avenue to growth that Verizon has repeatedly avoided.

The earnings call with Mr. Ellis today described what Verizon calls “organic growth” of the company. The exact definition of that strategy is not completely defined, but like any other communications provider and internet service provider, Verizon is consistently looking for content. The old “content is king” mantra is still paramount in this industry space.

In an increasingly visual world, the demand for video content is at the core of what Verizon needs to fill within their own content pipeline. It is in this vein that a strategic partnership or some sort of partnership agreement with Disney, Comcast, or CBS would make sense for Verizon. Those entities have their own exclusive content or partnerships to provide content for other entities such as Major League Baseball, the National Football League, and the National Hockey League.

The demand for sports content is always robust and the demand for other types of entertainment in digital platforms is a demand curve that Verizon is going to be relentless in trying to meet over the next several months. The earnings call also came on Thursday amidst reports that the Verizon FIOS television service has lost over thirteen thousand subscribers in a short amount of time.

The streaming media services and the growth of other platforms to watch content is causing many Americans to “cut the cord” on cable, telco, and satellite TV services. The “on demand” culture and the binge watching patterns of the new ways that consumers expect has caused the drop off in the FIOS subscriptions.

This could create conditions where FIOS, AT&T/DirecTV, and Comcast are forced to reinvent themselves and provide more value to the consumer for the service. The advent of the DirecTV service that allows the viewer to watch at home or on a tablet or smart phone is a step into the future of the television trends to follow.

The question of whether or not Verizon is exploring a merger is a complicated one. It would make some degree of sense on one hand given the complexities facing the industry and the changing dynamics of digital content consumption.

Verizon is also prepared to face rather significant anti-trust regulatory reviews especially if they were to merge with Comcast, which would absolutely create a monopoly in the industry. That merger would have far-reaching implications for both private homes and small businesses as the internet is needed for doing really everything today from shopping, to watching movies, and to work related functions.

It remains to be seen whether Mr. McAdam was taken out of context, or whether there is more than meets the eye with this story. The ambitions of Verizon will come into focus in the near future. The company should, at the very least, consider some kind of partnership with another media company to fill the video content gaps that exist currently.

Verizon also knows that mergers or acquisitions are a complicated process and that ties up time and resources from being able to grow the company in other ways. In the end, only time will tell which direction they choose to grow their business in an increasingly competitive, evolving, and cost driven environment.

by Frank Maduri

Walgreens Ups The Ante For Rite Aide Merger

In a follow up to prior pieces I have done on the proposed Walgreens – Rite Aid merger which would combine two of the largest retail drug chains in the United States, it appears that the proposal is taking another interesting twist.

In reports from Bloomberg and other sources, Walgreens has agreed to increase the number of stores it will sell to Fred’s, a Southeastern based retail drug chain, from 865 store locations to a higher but undisclosed amount. This is being done to “up the ante” to appeal to the Federal Trade Commission (FTC), which in my prior work on this topic, had demonstrated reluctance over the merger proposal.

The FTC displayed so much reluctance that myself and some others who have written about M&A activity of this type, felt that the merger may end up being blocked. That “where there is smoke, there is fire” scenario played out because Walgreens efforts with this enhancement to the deal they have with Fred’s certainly indicates that they felt the merger might get scuttled by the FTC.

In the enhanced version of Walgreens deal with Fred’s, Walgreens would also sell the southern based chain certain distribution centers, technology, and also would transfer some key executives from Rite Aid into similar roles at Fred’s. This was all done to help decrease the concerns that the FTC has seemingly held for the Walgreens-Rite Aid merger with regard to the size and scope of the acquisition.

The enhancement to the deal by Walgreens does not address the underlying cause for skepticism from the FTC in the first place: that Fred’s cannot double the size of its store footprint and survive. The stock price for Fred’s has increased about 30% with all of the renewed activity around this deal.

Walgreens-Rite Aid is currently caught in a scenario that many entities in a merger this large and far-reaching have had to grapple with in the past which is the sale of enough assets to not further dilute your own valuation, but sell enough assets to gain approval from the FTC. It can be a tricky situation and it is not always easy to find another company within your industry segment to make that type of asset sell off transpire in an expedient way.

The emergence of Fred’s in a “right place, right time” type of scenario with their business standing to increase dramatically in size, gain access to new geographic markets, and gain the use of some of the branding power of Rite Aid where the Fred’s brand name does not have the same recognition.

The FTC is reluctant, and they might remain unchanged in those sentiments, because they have been “burned” in the past with approvals of large scale M&A proposals which ended up going badly. Some of those deals ended up also damaging the third party company involved, in this case the role being played by Fred’s, where that third party company swallowed up assets which ended up bankrupting them.

The merger of Walgreens and Rite Aid would create a gigantic retail drug powerhouse that on the one hand could rival CVS, and on the other hand could end up limiting consumer choice. This merger also could have negative potential consequences for consumers with prescription drug costs being set by only a handful of companies. This is the area where some analysts close to this potential merger feel that the FTC is also concerned.

Walgreens maintains that they have grown to their capacity and that the only way that both they and Rite Aid can continue to compete and survive with stiff competition from CVS in this industry space, is to merge together. Walgreens seems intent on doing whatever is necessary to satisfy the FTC in order to consummate this deal. It could even mean involving another retail drug store chain, though I am not sure who that could be at this point. It could be a company like Safeway or Publix but those two companies have a current store geographic footprint that is much different than the Northeast heavy presence of Rite Aid.

The proposal gets complicated by the reports that some within the industry do not understand why Rite Aid is selling, basically with the thought process that being number 3, is a good place to be. Walgreens was pretty dogged in their presentation of offers for the Rite Aid business, continuing to pursue this blockbuster potential merger.

The FTC and other regulators will now review this enhanced version of the deal that Walgreens is offering to Fred’s. A determination will be made on whether the asset divestiture creates a path for the very large merger between Walgreens and Rite Aid to take place.

The exact parameters will become clear in the weeks and months ahead as we head through spring and into the summer months. The outcome is uncertain, but in the past when I have observed a company take the steps that Walgreens has undertaken to gain merger approval, that company usually gets what it wants.

by Frank Maduri

Follow Up: Dow – DuPont Merger Outlook Upgraded

The latest news on the now 12 month saga that is the Dow – DuPont merger proposal is that both stocks have been upgraded from “Hold” to “Buy”. The upgraded status from Jefferies is being reported by CNBC and Barron’s among other financial news outlets, and it is due to the outlook for the merger looking more promising.

The ratings staff at Jefferies places the new odds at “90%” that the year-long quest for the mega-merger of these two chemical giants will gain approval. The rationale behind this upgrade, according to their ratings report which was quoted by CNBC is that the increased stock market activity and economic growth has created conditions where the EPS (Earnings Per Share) for chemical companies will not be tied to just traditional metrics.

The changes in the economy also have combined to create favorable industry conditions in the chemical space. The regulatory bodies involved apparently maintain that this merger will not inhibit growth and competition in their specific industry segments.

This is the backdrop for the next round of regulatory proceedings, and if this merger is ultimately approved, it amounts to a whole new slate of issues for the farmer, the consumer, and the protection of our environmental resources

The detractors to this merger are still the farmers, some agricultural groups, and environmental groups. These factions all have legitimate claims to skepticism when it comes to an over $120 billion dollar merger that will further consolidate the seed industry for crops into fewer hands.

This merger, if approved, strikes fear into the environmental advocacy groups because of the prevalence of pesticides, herbicides, and other chemical agents that the combined Dow-DuPont will market more aggressively and more cost effectively to the farming and agricultural products areas.

The combined Dow-DuPont along with chemical giant Monsanto would control the majority of the seed industry used for crops for food and other staple crops such as corn, used for alternative energy sources. The stakes for the farming industry, which is dwindling because it is harder to maintain profitability, and is still dominated by family owned farms, are enormous. These two companies could set pricing and put enormous cost pressures on farms.

The proposed merger of these two chemical titans has been tied up in the European Union by their regulators, and at one point the outlook was bleak that it would move forward. The EU regulators were told by Dow-DuPont that they would sell some of their assets to clear up the concerns over anti-trust issues that the oversight board had regarding the merger.

In February, Dow-DuPont discussed with the EU board a plan to sell off some assets in DuPont’s crop protection brand portfolio and Dow’s acid copolymers and ionomers business holdings, this is from CBS Market Watch. In earlier work I have done on this specific merger, I had mentioned the selling off of business assets or brands as the best pathway to work with anti-trust, anti-monopoly concerns held by regulators in both the EU and the United States.

The US regulators, provided that the assets are sold, seem apparently through this upgrade and the reports today to be willing to move ahead with approving this merger. The changes potentially on the horizon in Congress with regard to business regulations and the strength of the overall business climate seem to have opened the opportunity for Dow-DuPont to get this done.

The concerns of the farmer, the consumer, and the environmental advocates have definite merit because any merger this large is going to have an impact on all of those areas: the food supply, costs of food and other products, increased pesticide/ GMO use, as well as potentially huge negative environmental consequences.

by Frank Maduri

Follow Up: Aetna Merger With Humana Is Scuttled

The proposed $34 billion merger between two healthcare giants: Aetna and Humana, has been scrapped by the order of the court system over concerns related to higher prices and less competition in the marketplace. Both companies considered an appeal of the court decision, but announced on Wednesday that they were going to accept the decision and dismantle the merger proposal.

The deal seemed doomed to fail from the start because of the enormous impact that it would have over the healthcare of millions of Americans. It would have condensed the number of companies which provide healthcare on a nationwide basis from five to just three. The combined entity would have held a sizeable portion of the Medicare Advantage market, which is a type of medical insurance product which replaces traditional Medicare with a plan that has lower monthly premiums but higher deductibles for most services.

The combined company would have held enormous influence at the negotiating table with other healthcare entities and would have been able to essentially set prices; which could have had drastic consequences to the consumer.

It ended up being these anti-trust concerns which ultimately spelled the demise of this proposed merger. This goes against the trend in recent years of these proposed mega-mergers eventually moving ahead and beyond the anti-trust issues. The uncertainty involving the national healthcare policy with the change in the U.S. Presidency to Donald Trump most definitely played a role in the eventual scuttling of this merger proposal by the senior level executives at both companies.

I have covered mergers and acquisitions for a few years now for many different news outlets. This proposed deal had a clause called a “breakup clause” which I have seen associated with other mergers in the past, where one party agrees to pay the other an agreed upon sum of money if the deal were to not come to fruition. In this situation the Aetna side agreed to pay a breakup fee to Humana.

The breakup fee is reportedly $1 billion that Aetna will pay to Humana, which after taxes is around $630 million. The two sides spent over a year and a half preparing this merger proposal, and all of that work, effort, and resources are now out the window. The shareholders of both entities will most assuredly have some strong feelings about the lost time and energy on this merger. The Aetna shareholders have the added grievance of the breakup fee or termination fee that is being paid out which will eat into profitably totals as well.

The recent negative news speculation regarding some of the Medicare Advantage products also likely played a role in the eventual breakup of this merger. The uncertainty in Washington right now over the future of the federal government decision making regarding a potentially new national health plan also certainly had to have been factored into this situation as well.

This merger was originally proposed during the previous administration in Washington and it was designed to offset some of the conditions in the marketplace that were created by the Affordable Care Act. Those conditions pushed both Aetna and Humana to pursue a merger to synergize their operational capabilities and to streamline their costs in order to maximize profitability.

The court system and regulatory bodies had scrutinized this deal pretty harshly from the onset. The emphasis of any proposed merger in an area as crucial to the public domain as healthcare is going to be treated differently than if two companies wanted to merge to bake bread and cookies in a more efficient manner.

The backdrop to this situation is an American public that has a general distrust of health insurance carriers and is paying more out of their budget for healthcare related services than ever before. The American public also has seen wage stagnation and increased costs for other goods and services and senior citizens feel the budget squeeze; which all of these factors contributed to the opinion of the court that the merger would have had a significant impact on the price and competition in the marketplace.

Furthermore, another factor that makes this merger different than other proposed M&A activity that I have covered in the past is that the path forward is unclear. I can usually speculate in other proposals that may have gone sideways about the next move for the companies involved. The fact that the landscape in the healthcare industry is already so limited on the national level, it leaves both Aetna and Humana with very limited options.

The path for Aetna may be to look at some regional acquisition targets to improve their presence further in certain regions of the country, but that is an incremental move for sure, as they already have a pretty significant overall national profile.

The path for Humana may be to diversify some of their operational capabilities by reviewing some options to expand into other insurance products beyond Medicare Advantage. I am not sure how successful that path will be based upon the potential scrutiny some of those potential activities may be met with from the court system.

The potential changes to the national healthcare policy will eventually guide the decision making of both companies as they navigate the new terrain of the industry at that point.

In the end analysis, the scuttling of this merger, at least at first glance, seems to be the appropriate decision by both the court system and the corporations involved. It would have limited competition in the marketplace and had a negative impact on price increases for a consumer base that has grown very weary of that narrative.

The potential consequences of this ultimately unsuccessful deal could present overarching implications for future M&A activity in the healthcare industry and other industries in the months and years ahead.