There is a method to the madness of retailers that want to buy health insurers, but Wall Street still isn’t crazy about it.
Walmart WMT 1.37% is in preliminary discussions to buy Humana, The Wall Street Journal reported on Thursday. While Walmart has long been a dominant pharmacy player, a deal would push it into new business lines. Humana manages private Medicare insurance plans and owns its own pharmacy benefit management business.
One obvious rationale lies beneath these talks: Retailers have an urgent need to maintain foot traffic. Pharmacies can help.
Grocery chain Albertsons illustrated this last month when it announced a deal to acquire the pharmacy chain Rite Aid. Pharmacy customers visit Albertsons stores an average of 2.3 times a week and spend $66 on groceries and $26 on prescriptions. Other customers visit less than once a week and spend just $24 weekly on groceries. A hypothetical entry from new online rivals like Amazon into the pharmacy business thus has the potential to hammer sales.
Adding an insurer to the fold has the potential to help protect the retail business if Walmart can expand the clinical options it can offer in stores. That thought process helped fuel CVS Health’s decision to purchase Aetna last year.
Yet that logic doesn’t mean that Walmart shareholders will be happy. For one thing, the cost of a potential deal is massive. Adding a 25% takeover premium to Thursday’s closing enterprise value would value Humana at about $46 billion. Walmart would have to stretch its balance sheet or heavily dilute existing shareholders to pay that. Minimal business overlaps mean there won’t be much opportunity to find cost savings by combining.
Yet that won’t ensure a smooth antitrust review. A Walmart-Humana tie up would mean three large deals involving health insurers will need regulatory clearance, including CVS-Aetna and Cigna’s planned purchase of Express Scripts Holding. Trump administration officials have criticized large health-care consolidation. Investors clearly are wary, since both Aetna and Express Scripts trade at significant discounts to implied offer values.
Skepticism may continue even if these deals are completed. Both CVS and Cigna have sold off sharply since unveiling their proposed deals. An Amazon entry into the pharmacy world would put these new competitive barriers to the test. Acquirers also are making pricey bets that health care regulatory rules won’t change in a way that disadvantages these deals.
If its wager backfires, everyday low prices will be where Walmart least wants it: in the stock price.
Write to Charley Grant at charles.grant@wsj.com
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