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Time Warner and AT&T mega-deal approval bodes well for health care mergers, says Oppenheimer

CVS, Aetna and Express Scripts are trading higher after a federal judge allows AT&T to acquire Time Warner
CVS store
The CVS-Aetna deal and Cigna’s purchase of Express Scripts are similar to the AT&T-Time Warner tie-up

The proposed US$69bn tie-up between drugstore chain CVS Health Corp (NYSE:CVS) and the health insurer Aetna Inc (NYSE:AET) looks more likely to gain regulatory approval, Oppenheimer analysts say, in the wake of a federal judge’s historic ruling to allow AT&T Inc (NYSE:T) to go ahead with its herculean acquisition of Time Warner Inc (NYSE:TWX).

The fact that Judge Richard Leon threw out the US Justice Department’s move to block the US$85bn AT&T-Time Warner deal is pushing up shares of CVS and Aetna, as well as Express Scripts (NASDA:ESRX), which has reached a US$67bn deal to be acquired by the insurer Cigna (NYSE:CI).

Both the CVS-Aetna deal and Cigna’s purchase of Express Scripts (NASDAQ:ESRX) are similar to the tie-up between AT&T and Time Warner as they are vertical mergers, which involve two or more firms within a single supply chain combining.

Now under review by the Justice Department, CVS and Aetna’s tie-up is set to close in the second half of the year, while Cigna’s takeover of Express Scripts should be wound up by the year’s close.

“The closely watched trial was seen as a precedent case for CVS-Aetna and Cigna-Express Scripts,” wrote Oppenheimer analysts Mohan Naidu and Mike Ott in a note to investors. “We believe today’s decision should lift the stocks involved in CVS-Aetna and Cigna-Express Scripts as investor sentiment improves on the regulatory decision in these mergers.”

CVS announced its plans for the takeover of Aetna last December. Pending the approval of regulators, Aetna shareholders will receive US$145 per share in cash and 0.8378 CVS Health shares for each Aetna share.

Cigna, meanwhile, disclosed its agreement to purchase Express Scripts in March in a cash and stock transaction, which is worth about US$67bn and includes the taking on of about US$15bn in debt.

Express Scripts shares are up 4.6% at US$82.85 in morning trade; CVS is trading 3.6% higher at US$68.79; Aetna shares have jumped 4% to US$187.91; and Cigna shares are down slightly, losing 1.3% to hover at US$176.43.

The Justice Department's lawsuit to block the merger of AT&T and Time Warner was based on concerns that AT&T, which owns the satellite television group DirecTV, will be able exploit its market dominance and charge rival cable and satellite distributors higher fees, which will, in turn, hurt local customers.

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