CVS Health acquired by Aetna: fairness opinion by Allen and Barclays and Goldman Sachs and Centerview Partners
Deal terms
Each Aetna common share converted into $145.00 in cash plus 0.8378 of a share of CVS Health common stock. Implied value approximately $207.94 per share based on CVS closing price of $75.12 on December 1, 2017; approximately $208.28 based on the October 25, 2017 unaffected date CVS closing price; approximately $204.11 based on February 8, 2018 CVS closing price.
Opinion of Allen to the target board
Discounted cash flow assumptions
Present value as of December 1, 2017 of stand-alone unlevered after-tax free cash flows; stock-based compensation treated as a cash expense; terminal year assumed growth in risk-based capital contributions commensurate with premium revenue growth. The implied per share equity value reference range table was truncated in the filing slice.
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Selected companies analysis | Allen & Company reviewed publicly available stock market and financial information for selected companies deemed generally relevant in evaluating Aetna and CVS Health; specific companies and ranges were truncated in the provided slice. | — |
| Selected transactions analysis | Allen & Company reviewed publicly available financial information relating to selected transactions deemed generally relevant in evaluating the merger; details truncated in the provided slice. | — |
Fee arrangement not included in the sliced sections.
Opinion of Barclays to the acquirer board
Discounted cash flow assumptions
Present value as of September 30, 2017. Excluding expected synergies: $170.50-$263.00 per Aetna share; including expected synergies (synergies terminal growth 1.5%): $191.50-$288.75. Barclays also performed a DCF of CVS Health standalone using 6.0%-7.0% discount rates and 6.5x-9.5x terminal FY2022 EBITDA multiples, implying $75.10-$112.93 per CVS share, and a combined-company DCF implying $72.81-$128.31 per share (synergies perpetuity growth 1.0%-2.0%).
Selected public companies (4)
UnitedHealth Group Incorporated · Anthem, Inc. · Cigna Corporation · Humana Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| P / 2018E Adjusted EPS | 18.0x | 19.6x | 21.4x | 17.0x–18.5x | $170.25–$185.25 |
Selected precedent transactions (15)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-07-24 | Cigna Corporation | Anthem, Inc. | — |
| 2015-07-03 | Humana Inc. | Aetna Inc. | — |
| 2015-07-02 | Health Net, Inc. | Centene Corporation | — |
| 2012-10-08 | Amil Participações S.A. | UnitedHealth Group Incorporated | — |
| 2012-08-20 | Coventry Health Care, Inc. | Aetna Inc. | — |
| 2012-07-09 | AMERIGROUP Corporation | WellPoint, Inc. | — |
| 2011-10-24 | HealthSpring, Inc. | Cigna Corporation | — |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group Incorporated | — |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. | — |
| 2005-07-06 | PacifiCare Health Systems, Inc. | UnitedHealth Group Incorporated | — |
| 2004-10-14 | First Health Group Corp. | Coventry Health Care, Inc. | — |
| 2004-04-26 | Oxford Health Plans, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10-27 | Mid Atlantic Medical Services, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10-27 | Wellpoint Health Networks Inc. | Anthem, Inc. | — |
| 2002-04-29 | Trigon Healthcare, Inc. | Anthem, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| P / NTM EPS | 13.0x | 20.3x | 44.3x | 19.0x–22.0x | $190.00–$220.00 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Transaction premium analysis | Reviewed premiums paid in 15 selected managed care transactions: 1-day premiums high 43.0%, mean 23.1%, median 21.2%, low 9.4%; 52-week high premiums high 35.0%, mean 12.2%, median 13.7%, low (25.1%). Barclays did not calculate implied equity values per Aetna share from this analysis. | — |
| Discounted cash flow analysis of CVS Health (standalone) | Discount rates 6.0%-7.0%; terminal FY2022 EBITDA multiples 6.5x-9.5x; based on CVS Health forecasts. | $75.10–$112.93 |
| Discounted cash flow analysis - illustrative pro forma combined company | Combined CVS and Aetna equity value ranges plus synergies (perpetuity growth 1.0%-2.0%), less new transaction debt, divided by pro forma fully diluted shares. | $72.81–$128.31 |
| Illustrative future share price analysis | Applied NTM adjusted P/E multiples of 11.60x-14.00x to CVS standalone NTM adjusted EPS for FY2017-FY2021 and 11.60x-15.00x to combined company NTM adjusted EPS for FY2018-FY2021. | — |
| Trading history / historical comparison | Reviewed trading histories of CVS Health common stock and Aetna common shares for the three years ending December 1, 2017 and compared with other relevant companies; reviewed published research analyst price targets for CVS Health and Aetna. | — |
CVS Health agreed to pay Barclays a transaction fee of $52 million, $5 million payable upon delivery of the opinion (not contingent on conclusion or completion) and the remainder contingent on completion of the merger. Barclays and affiliates estimated to receive approximately $142 million in fees in connection with the bridge loan facility, term loan facility and bond issuance. Received $23 million from CVS and $28 million from Aetna in prior two years.
Opinion of Goldman Sachs to the acquirer board
Discounted cash flow assumptions
Present value as of September 30, 2017. Excluding expected synergies: $159.50-$235.50; including expected synergies: $180.50-$267.00. Goldman also ran a CVS standalone DCF (6.25%-7.25% discount rates, 0.5%-1.5% perpetuity growth) implying $80.30-$118.84 per CVS share and a combined company DCF (6.25%-7.25% discount rates, 1.0%-2.0% perpetuity growth, discounted back at 7.8% cost of equity) implying $76.40-$129.88 per share.
Selected precedent transactions (15)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-07-24 | Cigna Corporation | Anthem, Inc. | — |
| 2015-07-03 | Humana Inc. | Aetna Inc. | — |
| 2015-07-02 | Health Net, Inc. | Centene Corporation | — |
| 2012-10-08 | Amil Participações S.A. | UnitedHealth Group Incorporated | — |
| 2012-08-20 | Coventry Health Care, Inc. | Aetna Inc. | — |
| 2012-07-09 | AMERIGROUP Corporation | WellPoint, Inc. | — |
| 2011-10-24 | HealthSpring, Inc. | Cigna Corporation | — |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group Incorporated | — |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. | — |
| 2005-07-06 | PacifiCare Health Systems, Inc. | UnitedHealth Group Incorporated | — |
| 2004-10-14 | First Health Group Corp. | Coventry Health Care, Inc. | — |
| 2004-04-26 | Oxford Health Plans, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10-27 | Mid Atlantic Medical Services, Inc. | UnitedHealth Group Incorporated | — |
| 2003-10-27 | Wellpoint Health Networks Inc. | Anthem, Inc. | — |
| 2002-04-29 | Trigon Healthcare, Inc. | Anthem, Inc. | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| P / NTM EPS | 13.0x | 20.3x | 44.3x | 15.0x–21.5x | $149.50–$214.25 |
| 1-Day premium paid (selected managed care transactions) | 0.1x | 0.2x | 0.4x | 0.2x–0.3x | $189.00–$203.25 |
| 52-Week high premium paid (selected managed care transactions) | -0.3x | 0.1x | 0.3x | — | — |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Transaction premium analysis | Applied a 18.0%-27.0% premium range (25th-75th percentiles of 1-day premiums in 15 selected managed care transactions) to the $160.12 unaffected Aetna closing price. | $189.00–$203.25 |
| Large transactions premiums analysis | Reviewed 25 US public target transactions announced January 1, 2013 - December 1, 2017 with enterprise value greater than $25 billion; median 1-day premium 29.0%, 25th percentile 18.2%, 75th percentile 36.4%. Applied 18.0%-36.5% to the $160.12 unaffected price. | $189.00–$218.50 |
| Discounted cash flow analysis of CVS Health (standalone) | Discount rates 6.25%-7.25%; perpetuity growth rates 0.5%-1.5%; based on CVS Health forecasts. | $80.30–$118.84 |
| Discounted cash flow analysis - illustrative pro forma combined company | Discount rates 6.25%-7.25%; perpetuity growth 1.0%-2.0%; CVS Health pro forma forecasts plus expected synergies; equity values per share discounted to September 30, 2017 at a 7.8% cost of equity. | $76.40–$129.88 |
| Illustrative future share price analysis / present value of future share price | Applied NTM adjusted P/E multiples of 11.60x-14.00x (CVS standalone) and 11.60x-15.00x (combined company) to NTM adjusted EPS, discounted to December 1, 2017 at a 7.80% cost of equity. Standalone CVS present values ranged from $72.76 (11.60x, 2017E) to $104.18 (14.00x, 2021E); pro forma combined values ranged from $77.14 to $102.45. | $72.76–$104.18 |
Transaction fee of $52 million, $5 million payable upon execution of the merger agreement and the remainder contingent upon completion of the merger. Goldman Sachs and affiliates estimated to receive approximately $142 million in fees in connection with the bridge loan facility, term loan facility and bond issuance. Received less than $5 million from Aetna in prior two years.
Opinion of Centerview Partners to the acquirer board
Discounted cash flow assumptions
Excluding synergies: $170-$263 per Aetna share. Including net synergies (2018-2022, same 2.0%-3.0% perpetuity growth and 6.5%-7.5% discount rates): $193-$299 per share. Centerview also performed a CVS Health DCF (discount rates 6.25%-7.25%, perpetuity growth 0.5%-1.5%) implying $80-$119 per CVS share.
Selected public companies (7)
United Health · Anthem · Cigna · Humana · Walmart · Walgreens Boots Alliance · Express Scripts
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / 2017E EBITDA (Aetna comparables) | 10.5x | 13.4x | 15.4x | — | — |
| EV / 2018E EBITDA (Aetna comparables) | 10.1x | 11.4x | 12.8x | 10.0x–12.5x | $159.00–$206.00 |
| EV / 2019E EBITDA (Aetna comparables) | 9.1x | 10.4x | 11.4x | — | — |
| P / 2017E Earnings (Aetna comparables) | 19.4x | 21.2x | 22.5x | — | — |
| P / 2018E Earnings (Aetna comparables) | 18.0x | 19.5x | 21.4x | 16.0x–21.0x | $160.00–$210.00 |
| P / 2019E Earnings (Aetna comparables) | 16.3x | 17.3x | 18.9x | — | — |
| EV / 2017E EBITDA (CVS Health comparables) | 6.8x | 9.3x | 10.2x | — | — |
| EV / 2018E EBITDA (CVS Health comparables) | 6.7x | 8.8x | 9.9x | 7.5x–9.0x | $74.00–$93.00 |
| EV / 2019E EBITDA (CVS Health comparables) | 6.5x | 8.5x | 9.6x | — | — |
| P / 2017E Earnings (CVS Health comparables) | 8.9x | 13.2x | 22.1x | — | — |
| P / 2018E Earnings (CVS Health comparables) | 8.2x | 12.4x | 20.9x | 10.0x–15.0x | $63.00–$95.00 |
| P / 2019E Earnings (CVS Health comparables) | 7.4x | 11.4x | 19.6x | — | — |
Selected precedent transactions (20)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2015-07 | Cigna (Terminated) | Anthem | — |
| 2015-07 | Humana (Terminated) | Aetna | — |
| 2015-07 | Health Net | Centene Corporation | — |
| 2012-10 | AMIL Participações | UnitedHealth Group | — |
| 2012-08 | Coventry Health Care | Aetna | — |
| 2012-07 | Amerigroup | WellPoint Health Networks | — |
| 2011-10 | HealthSpring | Cigna | — |
| 2007-03 | Sierra Health Services | UnitedHealth Group | — |
| 2005-09 | WellChoice | WellPoint Health Networks | — |
| 2005-09 | HealthMarkets | The Blackstone Group and others | — |
| 2005-07 | Pacificare Health Systems | UnitedHealth Group | — |
| 2004-10 | First Health Group | Coventry Health Care | — |
| 2004-09 | American Medical Security Group | Pacificare Health Systems | — |
| 2004-04 | Oxford Health Plans | UnitedHealth Group | — |
| 2003-10 | WellPoint | Anthem | — |
| 2003-10 | Mid Atlantic Medical Services | UnitedHealth Group | — |
| 2003-06 | Cobalt Corporation | WellPoint Health Networks | — |
| 2002-04 | Trigon Healthcare | Anthem | — |
| 2001-10 | RightCHOICE Managed Care | WellPoint Health Networks | — |
| 2000-11 | Cerulean Companies | WellPoint Health Networks | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | — | 12.0x | — | 11.0x–13.5x | $166.00–$210.00 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Discounted cash flow analysis of CVS Health (standalone) | Q4 2017 and 2018-2022 unlevered free cash flows per the CVS Health management projections; perpetuity growth 0.5%-1.5%; discount rates 6.25%-7.25%. | $80.00–$119.00 |
| Historical stock price trading analysis (Aetna) | 52-week closing price range for Aetna prior to December 1, 2017 was $105 to $192; highest closing price prior to the first day of transaction speculation was $165. Presented for reference only. | $105.00–$192.00 |
| Analyst price target analysis (Aetna) | Wall Street analyst price targets for Aetna ranged from $150 to $185 prior to transaction speculation and $165 to $200 after. Presented for reference only. | $150.00–$200.00 |
| Historical stock price trading analysis (CVS Health) | 52-week closing price range for CVS Health prior to December 1, 2017 was $66 to $85 versus the December 1, 2017 close of $75.12. | $66.00–$85.00 |
| Analyst price target analysis (CVS Health) | Wall Street analyst price targets for CVS Health ranged from $73 to $97 versus the December 1, 2017 close of $75.12. | $73.00–$97.00 |
| Relative value analysis (implied exchange ratios) | Cash-adjusted implied exchange ratios (Aetna equity value contribution reduced by $145 cash per share) versus the 0.8378x transaction exchange ratio. Without synergies: trading comps EV/EBITDA 0.1951x-0.6527x; 2018E P/E 0.2395x-0.6868x; DCF 0.3162x-0.9929x. With synergies (PV of near-term synergies of $9.4 billion, 50-75% attributed to Aetna): EV/EBITDA 0.3637x-0.8594x; 2018E P/E 0.4317x-0.8882x; DCF 0.4655x-1.1485x. | — |
CVS Health paid Centerview an aggregate fee of $12 million upon the rendering of Centerview's opinion, plus expense reimbursement and indemnity. Centerview had not been engaged on a fee-paying basis by CVS Health or Aetna in the prior two years.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | CAGR |
|---|---|---|---|---|---|---|
| Revenue | $191B | $205B | $217B | $231B | $246B | 6.5% |
| Revenue growth | 4.1% | 7.2% | 6.0% | 6.3% | 6.3% | |
| EBITDA | $13B | $14B | $14B | $15B | $16B | 4.3% |
| EBITDA growth | 4.8% | 3.8% | 5.1% | 5.6% | 2.6% | |
| EBITDA margin | 7% | 7% | 7% | 7% | 6% | |
| Implied EV / EBITDA | 6.8x | 6.6x | 6.3x | 5.9x | 5.8x |
Year-1 growth is against LTM at announcement ($184B revenue, $13B EBITDA); later years are year over year.
Aetna management projections (2017P-2022P) showed Aetna adjusted revenue growing from $60.5 billion in 2017 to $87.8 billion in 2022, adjusted earnings from $3.3 billion to $4.2 billion, and adjusted EPS from $9.84 to $15.36; supplemental Aetna projections showed adjusted EBITDA of $5.9 billion in 2017 rising to $8.3 billion in 2022 and unlevered free cash flow of $3.4 billion in 2017 and $3.0 billion in 2022. CVS Health management prepared "adjusted Aetna projections" (substantially the same aggregate figures, with 2018 unlevered FCF of $3.2 billion) which Barclays, Goldman Sachs and Centerview were directed to use. CVS Health management projections (2017P-2022P) showed net revenue of $183.7 billion rising to $245.6 billion, adjusted EBITDA of $12.5 billion rising to $15.5 billion and adjusted EPS of $5.87 rising to $9.36; CVS Health combined company projections and expected synergies were also provided to the CVS advisors.
Process notes
Other Pharmacy / Infusion fairness opinions
- PharMerica / KKR 2017 · 9.6x EV/EBITDA
- Diplomat Pharmacy / UnitedHealth Group 2019 · 12.1x EV/EBITDA
- Omnicare / CVS Health 2015 · 15.8x EV/EBITDA
- Walgreens / Sycamore Partners 2025 · 52.4x EV/EBITDA
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