CVS' bid faces uphill fight given AT&T antitrust suit

A monitor displays CVS Health Corp. and Aetna Inc. signs Monday on the floor of the New York Stock Exchange.
A monitor displays CVS Health Corp. and Aetna Inc. signs Monday on the floor of the New York Stock Exchange.

CVS Health Corp.'s $67.5 billion takeover bid for Aetna Inc. will test the Trump administration's approach to far-reaching corporate takeovers, just weeks after the U.S. government sued to block a major telecommunications merger.

The proposed health-care deal unveiled Sunday would create an industry giant with over $240 billion in annual sales with a hand in insurance, prescription drug plan administration, retail pharmacies and corner clinics. The companies said the combination will save $750 million in costs and deliver better, more efficient health care to customers.

"They'll be pretty much a soup-to-nuts health company ... except for the hospital part of it," said Craig Johnson, president of Customer Growth Partners, a retail consulting and research firm.

In the past, deals combining companies up and down a chain of business -- such as a supplier and a distributor -- have been viewed as posing less anti-competitive risk than combinations of direct rivals. Last month, however, the Justice Department sued to block just such a "vertical" merger between AT&T Inc. and Time Warner Inc., saying it would harm consumers and limit their media content options.

"We are obviously going to get some scrutiny," Aetna Chief Executive Officer Mark Bertolini said Sunday. "We are prepared to deal with whatever comes along to make this work."

An analyst said the CVS-Aetna combination should have a good chance of approval because the two companies' businesses have little overlap.

"We also believe that [President Donald Trump's] administration is more business-friendly" and that regulators may view a CVS-Aetna deal "as a way to continue to put pressure on manufacturers and drug prices," David Larsen, an analyst at Leerink Partners, said in a note.

Shares of CVS Health and Aetna fell Monday. CVS shares fell $3.43, or 4.6 percent, to close at $71.69. Shares of Aetna fell $2.61, or 1.4 percent, to $178.70 after an early morning jump. That's below CVS' $207-a-share offer for the company and a sign investors are skeptical the deal will close at the current price.

How much scrutiny the deal gets from the government may depend on which federal agency reviews it-- the Justice Department or the Federal Trade Commission.

The FTC has typically handled mergers of retail businesses like CVS. While it allowed Walgreens Boots Alliance Inc. to buy more than 1,900 Rite Aid Corp. stores earlier this year, the deal had to be significantly scaled down to gain the regulator's approval. The Justice Department, meanwhile, successfully sued to block insurance mergers between Anthem Inc. and Cigna Corp, and Aetna and Humana Inc.

In the past, vertical deals have typically won approval after companies agreed to restrictions on how they operate.

That may be changing. The Justice Department's new antitrust chief, Makan Delrahim, has criticized past settlements that allowed vertical deals with behavioral restrictions. In a speech last month, Delrahim said such conditions don't work and force antitrust enforcers to become regulators.

That view was behind Delrahim's decision on Nov. 20 to sue to block AT&T's proposed acquisition of Time Warner, a vertical deal that would meld Time Warner content like HBO with AT&T's pay-TV and wireless distribution.

"Most vertical deals don't raise antitrust concerns, and the ones that do generally get approval to close with an agreement containing behavioral conditions," said Jennifer Rie, a Bloomberg Intelligence analyst who follows antitrust issues, in an email. "But the Justice Department appears to be rejecting this kind of remedy given its approach to the AT&T-Time Warner deal."

That doesn't mean there's heightened opposition to vertical deals at the Justice Department, but CVS might prefer the Aetna deal to go to the FTC given Delrahim's criticism of behavioral fixes, said David Kully, an antitrust lawyer at Holland & Knight in Washington and a former Justice Department attorney.

"Delrahim was very clear in his concerns about behavioral decrees and then put his money where his mouth is when he brought the AT&T case," Kully said.

The deal should improve access to care and also lower premiums for many customers, Aetna's former CEO John Rowe said in an interview on Bloomberg Radio. Other customers might find themselves not getting the benefits of the combination if they're covered by Aetna but not near a CVS, said Rowe.

"It's hard to imagine not being near a CVS, but I guess there are some people who don't live near a CVS and who might feel as if they're being channeled into one area of care that might not be as convenient for them," he said.

A condition to an approval could be measures preventing Aetna from steering patients to CVS pharmacies over competitors such as Walgreens, said Rie, who also said CVS may be better off if the FTC takes the review.

One point in favor of the CVS-Aetna deal is that there's already another large insurer with many of the characteristics of a combined health company. UnitedHealth Group Inc. offers health insurance, administers drug benefits and runs a growing network of doctors and clinics.

But the CVS-Aetna combination takes integration to a new level with its 9,700 retail drugstores. It would also allow CVS to expand its 1,100 walk-in clinics, saving Aetna's insurance customers money by steering patients away from expensive hospital emergency rooms.

The CVS website Monday said the company operates 11 pharmacies in Arkansas, most of them in the center of the state.

Information for this article was contributed by Robert Langreth, David McLaughlin and Zachary Tracer of Bloomberg News, Samantha Masunaga and James F. Peltz of the Los Angeles Times and Tom Murphy of The Associated Press.

A Section on 12/05/2017

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