Why Walmart Might Want to Acquire Humana

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Late Thursday, reports began to trickle in that retail behemoth Walmart Inc. (NYSE: WMT) was in preliminary negotiations to acquire health insurer Humana Inc. (NYSE: HUM). Humana’s market cap of around $37 billion makes this a very big deal, even if the talks result in some sort of partnership between the two firms.

Walmart operates a massive pharmacy business, and it’s no secret that many of its pharmacy customers are seniors. Humana operates the second-largest Medicare Advantage program in the country and also owns its own pharmacy benefits management company. The two companies have already teamed up on Medicare Part D drug plans.

The negotiations, which neither Walmart nor Humana has so far acknowledged, might be another response by Walmart to a recent announcement by Amazon.com Inc. (NASDAQ: AMZN), JPMorgan Chase & Co. (NYSE: JPM), and Berkshire-Hathaway Inc. (NYSE: BRK-A) that the three firms would seek a solution to rising health care costs for their employees.

Amazon is also said to be looking to get into the pharmacy business, a revelation that shook up the pharmacy industry for a while in February. Walmart, which has been spending big to compete with Amazon in the online sales wars, could ill afford to let Amazon get a toehold in the prescription drug business without at least making an effort to counter such a move.

Humana’s effort to merge with insurer Aetna Inc. (NYSE: AET) was derailed on antitrust grounds, and the company probably realizes now that it needs to make a similar-sized deal if it wants to remain competitive in the rapidly consolidating health care space.

Reports of the talks pushed Walmart stock up about 1.4% Thursday to a closing price of $88.97, in a 52-week range of $71.23 to $109.98. The stock’s 12-month consensus price target is $105.32.

Humana’s shares closed up about 0.5% at $268.83, after jumping to more than $271 when the reports first appeared. The stock’s 52-week trading range is $205.19 to $293.35, and the 12-month price target is $299.11.