The Medco Health Solutions Inc. (NYSE: MHS) and Express Scripts Inc. (NASDAQ: ESRX) merger saga is one which may go down in the financial history books for one of the more long and drawn out mergers. This combination would allow for great savings internally with scale, but there are many questions which remain about whether or not this transaction will be cleared. While telecom is very different from being a drug prescription benefit manager, the blocked AT&T Inc. (NYSE: T) buyout of T-Mobile may have more to do with the wide merger spread than anything.
Because we have covered this merger and because we cover financial news, we receive many emails on this topic. While we have received little to no great emails on how the merger will benefit the public, we have received ample emails from industry watch groups and public outreach groups which have stated their opposition to this merger. Take a look at the headline summaries from MergerInvesting.com and you can see just how much opposition there is compared to support.
The merger arbitrage spread in this deal today is right at 13% when other normal mergers carry traditional merger arbitrage spreads of 1% to 4%. Part of the arbitrage is because Express Scripts has offered to buy Medco in cash and stock, but there is a serious degree of approval uncertainty priced in here.
With a deal that is not expected to receive approvals until the first or second quarter (if then), it sure seems as though the merger-arb community is not overly convinced that this merger will go through. If the deal does go through, there could be many divestitures or asset sales which are required.
One institutional broker who covers some merger-arbitrage and index-arbitrage accounts gave a bit of a funny quote here when we asked for feedback. His answer, from one of his clients, about whether or not the merger would be allowed was simply “Give me one second, there is no easy answer.”
The Department of Justice noted as far back as September of 2011 that this merger was going to face an extended review period. Medco holders will own about 41% of the combined interest after this merger, if it is approved.
The company with the highest degree of flux before and after this deal could be Catalyst Health Solutions, Inc (NASDAQ: CHSI) with a market cap of under $3 billion. Much of the public (and investing public) is not even aware of it under the name Catalyst Rx.
There is one interesting merger ETF to consider in arbitrage. It is the IQ Merger Arbitrage ETF (NYSE: MNA). Unfortunately, it is very thin trading volume.
Keep in mind that there are no assurances that the DOJ, the FTC, nor other agencies will actually try to block this acquisition. There are no assurances of approval either. A chart of the spreads from Bloomberg has been shown below.
JON C. OGG