Walmart Inc. WMT 1.37 % is in preliminary talks to buy insurer Humana Inc., according to people familiar with the matter, a deal that would mark a dramatic shift for the retail behemoth and the latest in a recent flurry of big deals in health-care services.
It is not clear what terms the companies may be discussing, and there is no guarantee they will strike a deal. If they do, the deal would be big: Humana currently has a market value of about USD 37 billion.
It also would be Walmart’s largest deal by far, eclipsing its 1999 acquisition of the U.K.’s Asda Group PLC for USD 10.8 billion. Walmart, which in addition to being the world’s biggest retailer is also a major drugstore operator, has a market value of about USD 260 billion.
The two companies are discussing a range of options, including an acquisition, one of the people familiar said. Shares of Humana surged 10% to USD 297 in after-hours trading after The Wall Street Journal first reported the talks. Walmart shares slipped 1% to USD 88.10 in late action.
Health Care Revamp
A Walmart-Humana deal would cap a series of transactions that could transform the business of managing health care.
Should there be a deal—and should regulators and shareholders bless it—it would transform Walmart overnight into one of the nation’s largest health insurers. It would immerse the company in a complicated industry, one that continues to evolve eight years after the Affordable Care Act was enacted and as Washington remains deeply divided over health-care policy.
The talks come as health-service providers are rapidly pairing off and retailers—particularly pharmacy chains—are looking to diversify and bulk up in the face of the competitive threat from e-commerce giant Amazon.com Inc.
In December, CVS Health Corp. agreed to buy Humana rival Aetna Inc. in a USD 69 billion deal aimed at allowing the drugstore-chain to capture more of what consumers spend on health care. In March, health insurer Cigna Corp. agreed to buy Express Scripts Holding Co. , the biggest administrator of prescription-drug benefits in the U.S., for USD 54 billion.
Walmart has a vast pharmacy business, with locations in most of its roughly 4,700 U.S. stores and in many of it Sam’s Club warehouse locations. Humana is a Medicare-focused insurer that could deepen Walmart’s relationship with a key demographic – senior – at a time when the retailer is being threatened by Amazon on several fronts.
For Walmart, a deal would hand it a new role in health care, as well as a rich trove of data. In addition to its pharmacies, Walmart already has some primary-care clinics and recently said it would work with a major laboratory company to begin offering lab-testing services in some stores.
In announcing that partnership last June, a Walmart executive said the company was “not only focused on providing accessible, affordable health care, but also working to extend our offerings—truly making our stores a one-stop shop for our customers’ everyday health and wellness needs.”
The Bentonville, Ark., retailer is the country’s largest private employer, with about 1.5 million U.S. workers, and a deal with Humana could allow the retailer to save on its own insurance plan.
Humana, which had USD 53.8 billion in revenue last year, is the second-biggest provider of the private Medicare plans known as Medicare Advantage. Humana has about 17 % of the Medicare Advantage market, according to a tally by analysts at Wells Fargo, with about 3.5 million participants. Medicare is viewed as a growth engine in the insurance industry, as the baby boomers age into the programme.
Humana also owns its own pharmacy-benefit manager, which itself had revenue of about USD 21 billion last year, and Walmart and Humana already partner on Medicare drug plans. Humana has about 4.9 million people enrolled in its Medicare drug plans, known as Part D plans, and is the third-biggest provider of them, according to Wells Fargo.
Humana has been expanding into the business of providing health care, working closely with doctors. The insurer has said it aims to get deeper into managing the care of its members, as a means of curbing costs and meeting quality goals. Last year, the company said it would take a stake in a big home-health and hospice-care provider.
Meantime, Amazon has loomed ever larger in the health-care industry, especially after its January announcement that it would partner with Berkshire Hathaway Inc. and JPMorgan Chase & Co. on a venture to reduce their employees’ health-care costs. Amazon has been eyeing an entry into the pharmacy-services industry, and it recently expanded its discounted Prime program to beneficiaries of Medicaid, the government health-coverage program for lower-income people, a key demographic for Walmart.
A Walmart-Humana deal would cap a rapid-fire series of transactions that could transform the business of managing health care. Many of the biggest health insurers are pairing up with others outside their industry to create behemoths with a far larger role in the health-care sector after two attempted health-insurance mergers were blocked in early 2017 by courts on antitrust grounds: Aetna-Humana and Anthem Inc. -Cigna.
Healthy scepticism about Walmart and Humana
Walmart would pay a big price for uncertain benefits in health insurance deal
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 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 USD 66 on groceries and USD 26 on prescriptions. Other customers visit less than once a week and spend just USD 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 does not mean that Walmart shareholders will be happy. For one thing, the cost of a potential deal is massive. Adding a 25 % takeover premium to March 29 closing enterprise value would value Humana at about USD 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 would not 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.
Scepticism 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 would not 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.