Oliver Chen, an analyst with Cowen & Co., places the odds of an acquisition of Humana by Walmart as high as 40%. He said odds are as high as 80% the two will arrange a partnership or some type of joint venture.
Chen said there are many direct synergies in a possible deal but it would be only slightly accretive to Walmart shareholders in an cash/debt deal. He said Walmart could use its 4,800 locations as leverage along with its 140 million weekly customers and its plethora of consumer data. Humana has it own mounds of data and healthcare expertise.
Chen said Walmart benefits from shoppers who purchase pharmacy and grocery because they spend about 3.5% more than a typical grocery shopper. He also said healthcare is a multi-generation play for Walmart.
“Given the challenges in retail and healthcare today, I expect to see some unusual bedfellows in the future,” Chen said.
Humana is one of the top 10 health insurance companies, according to the Kaiser Family Foundation. Following is the market share info from Kaiser:
Blue Cross, Blue Shield (excluding Anthem): 23%
Analysts with Raymond James & Associates said news of ongoing talks between Walmart and Humana was not a total surprise given the CVS and Aetna deal that was smaller in scale. Raymond James analyst Budd Bugatch said the economics of a Humana acquisition are viable. He said a full acquisition would cost Walmart about $51 billion and would be the largest acquisition the retailer has ever made. He said a deal this large would likely face regulatory hurdles. He pegs the potential earnings bump for Walmart shareholders, if such a deal took place, at about 2%-3% this year.
That analysis did not include potential synergies which would sweeten the deal. Health and wellness already comprised 11% of Walmart’s U.S.revenue and 6% of Sam’s Club sales. Bugatch said a deal would give Walmart more “touchpoints” with customers because the retailer could leverage Humana’s existing network of clinics and home health services.
Bugatch said healthcare is a fragmented, complex and regulated industry. He said the sector has been in a favorable underwriting cycle for about eight years, which is unprecedented and has been driven by the rise in high deductible plans, which has raised the cost of access to healthcare for members – a reality that may not continue. He said in the health insurance business, unit growth comes with the challenge of effectively pricing the related health risk of the individual. He expects the issues could result in increased margin pressures among the healthcare entities. He said the biggest risk for Walmart outside of finances would be the potential distraction a transaction of this magnitude would add to the ongoing and significant challenges in the retail sector.
“Over the past two to three years, management has spent considerable time, energy and capital to improve its U.S. supercenter business with 14 consecutive quarters of positive comparable store sales and 13 consecutive quarters of positive comparable store traffic, to develop its $11.5 billion US eCommerce business, to begin to fix its Sam’s Club business, and to re-energize its international operations. Any distractions that could derail one or more of these initiatives would undoubtedly harm shareholders and could outweigh the potential benefits,” Bugatch noted.
He said benefits of a deal would require the merger of deep health expertise and rich customer data with a shared mission of cost discipline. Walmart can benefit from Humana helping it gain access to senior citizens, the most attractive segment of the healthcare market. That demographic consumes more drugs than any other segment of the population, he said.
A potential acquisition could also add another element to Walmart’s last mile initiative – delivering drugs and health care benefits to individuals in their homes along with other food and related consumer goods. He said 24% of Humana’s members (800,000 of 3.3 million member) access in-home health care, and that the combination would help “Walmart outflank Amazon and its partners” who are also trying to get in the healthcare sector.
Treistman Group President Joan Trestman noted on a RetailWire blog she doesn’t see a Humana deal helping Walmart in the long run.
“Health insurance coverage and reimbursement is complicated,” Trestman wrote. “It means a totally new operating system and trained staff. Walmart has earned a reputation for squeezing its suppliers to maintain low prices for its customers. If that’s a guiding philosophy it doesn’t bode well for patients and healthcare providers.”
CEO Randy Oostra of hospital group ProMedica told the Wall Street Journal the deal “should be a concern to everybody in healthcare.” He said Walmart could join an already-crowded field siphoning off revenue from outpatient clinics which subsidize money-losing hospital services.
Retail insider and consultant Phil Chang said the success of a retail/healthcare merger will be largely determined by how much consumers want the sectors connected.
“On one hand, it might make for less confusing [prescription] fills and refills. On the other hand, how much privacy does this afford the consumer? Will the healthcare portion of the retailer be able to see everything I’ve bought? Let’s take this to the extreme. If my Walmart shopping history contains a high content of sugar and sodium rich products — sodas, confections, etc., and I get diabetes, does Walmart, my healthcare provider, now say that I don’t qualify for Medicare because of my lifestyle choices?” Chang notes on the RetailWire blog post.
Wall Street analysts have largely been supportive of a possible Walmart and Humana partnership but the bulls have favored Humana with shares (NYSE: HUM) rising 4.4% in active trading on Monday to close at $280.70. Walmart Stores shares (NYSE: WMT) closed down 3.84% at $85.55. Neither party has said anything publicly about the alleged merger or joint venture talks.
Walmart also is rumored to be in talks to acquire online pharmacy PillPack, according to a CBNC report. Walmart did not confirm any talks, saying only it does not comment on rumor or speculation.
Analysts say PillPack could be picked up for under $1 billion. The startup online pharmacy manages prescription medications for its customers and packs a person’s pills together for easy organization. The company also delivers.