How Much In Synergies Does CVS Need To Justify Its Acquisition Price For Aetna?

by Trefis Team
CVS Health
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Drug retail chain CVS (NYSE:CVS) has completed a $40 billion bond sale, the third-largest corporate bond sale on record, to finance its proposed acquisition of health insurer Aetna (NYSE:AET). The acquisition price of around $68 billion appears quite steep, considering that Aetna hasn’t seen much growth lately. We have created an interactive dashboard that shows a compact valuation calculator for Aetna, and compares that valuation with CVS’ proposed acquisition price. Our base estimate shows that Aetna would be fairly priced at closer to $146 per share, which is well below the $207 acquisition price per share. Can this difference be justified by expected synergies? We believe that it may be difficult to do so.

Estimates Based On 2018 Expectations

We estimate EPS of just under $6 for Aetna in 2018, based on our expectation of revenue of close to $62.4 billion, earnings margin of 3.1% (same as that for 2017), and average share count of 335 million. In addition, we believe that Aetna would be fairly priced at a P/E multiple of 25, which gives us a price estimate of $146. The current market price takes into account the acquisition bid, and as a result, the company’s P/E multiple has jumped this year. However, industry P/E multiples stand at around 23, and some of Aetna’s biggest competitors have P/E ratios ranging from 16 to 24. Therefore, a P/E multiple of 25 for valuing Aetna certainly seems fair.

Given CVS’s acquisition price of $207 per share, the difference between our estimated fair price and the acquisition price stands at around $60 per share. While CVS was undoubtedly willing to pay a premium for Aetna given the potential benefits to its business as well as synergies, the discrepancy of around $20 billion between our price estimate and the acquisition price is unlikely to be explained entirely by synergies. Will CVS be able to justify the premium it is paying for the Aetna acquisition? If you disagree with our valuation estimate, you can modify our assumptions and forecasts on our interactive dashboard and come up with an estimate that better incorporates your expectations.

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