NEW YORK (Reuters) – CVS Health Corp’s planned US$66bn buy of Aetna Inc is poised to boost the healthcare sector’s share of US investment-grade mergers and acquisitions lending beyond its current one-third share of the US$122bn total as the sector remains a bright spot in an otherwise lackluster market.
Healthcare was already the busiest sector for US high-grade M&A loans, with year-to-date volume of US$40.5bn more than double the US$18.5bn for the second-placed retail sector, according to Thomson Reuters LPC data, before US pharmacy operator CVS’s offer to purchase the third-biggest health insurer in the US was reported on October 26.
Based on Aetna’s market capitalization, CVS’s acquisition will be the largest healthcare insurance deal on record, according to Thomson Reuters Deals Intelligence, and a loan backing the deal could take US high-grade healthcare M&A lending past the US$42.75bn tally for full-year 2016.
Bankers remain eager to provide financing for high-quality transactions and are actively pitching financing packages to CVS.
“There are a lot of banks hovering around, willing to utilize their balance sheet,” one banker said. “They are proposing bridge structures and financing structures that are pretty attractive for the client, in big sizes, for the cash portion.”
Healthcare deal-making got off to a slow start in the first quarter, as companies waited for the results of early failed attempts to repeal and replace Obamacare and details of US tax reforms, but acquisitions that were unlikely to be thwarted by antitrust rulings started to emerge in April.
Consolidation remains a popular option for insurers and pharmacies that are under pressure from the government and large corporations to lower soaring medical costs, Reuters reported.
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US M&A activity has been tempered by uncertainty about the implementation of healthcare, tax and trade changes pledged by the Trump administration. US investment-grade M&A lending of US$$122bn is 18% lower in the year to date than the same period of 2016.
Mergers have largely been contained to companies seeking growth in a slow-growing economy by buying complementary businesses.
The healthcare sector’s 33% share of high-grade acquisition finance is already higher than 23% in full-year 2016, although the rising share is from a smaller overall high-grade lending pool.
Drug distributor Cardinal Health Inc’s US$6.1bn deal to buy Medtronic Plc’s medical supplies units in April, just days after Abbott Laboratories agreed to a long-awaited US$5.3bn purchase of diagnostic testing company Alere Inc, were the first deals to raise the sector’s pulse.
Earlier in April, two high-profile insurance company mergers – Aetna with Humana and Cigna with Anthem – were scrapped by separate anti-trust rulings and the loans backing the financings fell away.
Once the chute was opened, Becton Dickinson announced its US$24bn purchase of C R Bard in the medical device sector on April 24 and Gilead Sciences said on August 28 that it was buying Kite Pharma for US$11.9bn, which produced the two largest healthcare loan financing transactions this year of US$15.7bn and US$6bn, respectively.
While the second-placed retail sector’s share of high-grade M&A lending also has climbed this year, to 15% from 5% for all of last year, most of that backs Amazon’s purchase of high-end grocer Whole Foods – whereas the number of healthcare mergers is growing, according to LPC data.
The beleaguered retail sector is threatened by a growing preference for online shopping and the growing tentacles of Amazon. Amazon’s recently reported interest in the pharmacy business may have sped up the CVS bid for Aetna, some bankers said.
More healthcare mergers are widely anticipated, as consolidation for competitive advantage continues. Lower US corporate tax rates, if passed, are expected to free up more cash for more deal-making, bankers said.
“Healthcare in a lot of ways is very fragmented, with some very strong in certain treatments and subsectors, and it might be easier to see some of these mega-acquisitions” to achieve expansion, another banker said.
Reporting by Lynn Adler; Editing By Tessa Walsh and Michelle Sierra