CVS Health (CVS) has acquired Aetna for a total price of $77 billion in an effort to transform their business model. Along with CVS’s retail pharmacy and pharmacy benefits manager (PBM) business Caremark, the acquisition of Aetna adds the third largest healthcare insurer in the United States to the CVS healthcare model.
CVS agreed to pay $207 per share, which values Aetna’s equity at $69 Billion and 11.7x EBITDA. This brings their leverage to 4.6x and adds $45 Billion in debt (for a total of $76 billion). Management expects leverage to be at 3.5x two years after the close and ultimately at 3x with rapid de-leveraging being a top priority. CVS has been aggressively de-leveraging their balance sheet by halting share repurchases and dividend increases until their leverage gets down to 3x.
CVS provides investors with more current yield (2.78%) than their closest healthcare competitor Walgreens (WBA) current yield (2.24%), a nearly equivalent payout ratio, and more dividend growth historically.
Based on CVS aggressively de-leveraging their balance sheet, this may happen within only a few years. Based on two key multiples portrayed on the chart below, CVS has a forward p/e ratio of 10.34 compared to 12.11 for WBA. CVS also has a forward EV/EBITDA of 8.857 compared to 9.599 for WBA. This is important because the lower these multiples are could indicate the stock is currently undervalued.