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June 15, 2018

A judge approved the $85B AT&T-Time Warner deal—and health care's mega-merger mania just kicked up a notch

Daily Briefing

    A federal judge on Tuesday ruled that AT&T could proceed with an $85 billion deal to purchase Time Warner, and experts have said the ruling could signal pending health care mergers are more likely to succeed.

    AT&T on Thursday announced it had completed the acquisition.

    Case details

    The Department of Justice (DOJ) had challenged the merger between AT&T and Time Warner over antitrust concerns. According to Politico's "Pulse," the case marked the first time in roughly 40 years that DOJ had challenged a vertical merger: that is, a merger between firms that own different parts of a supply chain.

    U.S. District Court for the District of Columbia Judge Richard Leon ruled the merger did not violate antitrust laws, determining that it would likely not reduce competition or raise prices for consumers.

    Ruling could mean health care mergers are more likely to proceed

    Experts have said the approval could mean DOJ will be less likely to successfully challenge the proposed merger between Aetna and CVS Health, as well as the proposed merger between Cigna and Express Scripts, "Pulse" reports.

    Following the ruling, stock prices of:

    • Aetna rose 3% to $186.50;
    • Cigna rose less than 1% to $180;
    • CVS Health rose 2% to $67.50; and
    • Express Scripts rose almost 5% to $83.

    RBC Capital Markets analyst George Hill said, "The court decision to allow the media merger to proceed will likely be interpreted to mean similar vertical mergers would be permitted in the health care space. We would expect to see deal spreads narrow going forward."

    Separately, Jefferies researchers in an investors' note concluded, "(The) decision, in our view, makes it more difficult for the DOJ to successfully support a case for the CVS-(Aetna) deal harming consumers."

    Charles Rhyee, managing director and senior research analyst at Cowen, said the ruling "bodes well" for CVS Health proposed acquisition of Aetna.

    In addition, Evercore ISI called the judge's decision "positive" for the Cigna-Express Scripts merger. However, Evercore ISI analysts also noted that the AT&T-Time Warner deal is materially different than the Cigna-Express Scripts deal, saying "Although the government in both cases will argue that the deals would result in higher consumer costs, [pharmacy benefit management] services may be viewed as more replaceable and interchangeable than TV content, which is differentiated by channel or program, and the efficiencies and cost savings of medical/pharmacy benefit integration may be more demonstrable."

    Meanwhile, Axios' "Vitals" reports that there is still a possibility that antitrust officials could block both sets of proposed health care mergers on the basis that the mergers would create an incentive for the companies to exclude competitors from their pharmacy benefit and health insurance options.

    Other proposed vertical mergers could be on the horizon

    According to "Pulse," there could be more proposed mergers in the health care industry.

    Craig Garthwaite, a strategy professor at Northwestern University's Kellogg School of Management, said, "We are seeing vertical mergers in health care because we are seeing a changing landscape of reimbursement and a move to some type of value-based payment. In this world, we should expect that firms need a different set of assets and activities to succeed" (Rege, Becker's Hospital Review, 6/13; Diamond, "Pulse," Politico, 6/13; Haefner, Becker's Hospital CFO Report, 6/13; Baker, "Vitals," Axios, 6/13; Manchester, The Hill, 6/14).

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