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The AT&T – Time Warner Decision Makes Way For This HUGE Healthcare Deal

The AT&T – Time Warner Decision Makes Way For This HUGE Healthcare Deal

This explosive trade is the one to make following the landmark decision.

On Tuesday, a federal judge gave AT&T (NYSE: T) a huge victory approving its $85 billion acquisition of Time Warner (NYSE: TWX).

The deal not only promises to transform the media industry, but also paves the way for so-called vertical mergers of complimentary companies to get easier approval, and providing investors with one particularly good trading opportunity.

The green light on the AT&T – Time Warner deal has cleared the way for Cigna’s (NYSE: CI) pending takeover of pharmacy benefit manager Express Scripts (NASDAQ: ESRX).

“As the first major antitrust case under the current administration and the first time the Department of Justice has tried a vertical merger case in ~40 years, the judge’s ruling in favor of the T/TWX deal has a positive read-through for the CI-ESRX merger…” said drug analyst Ross Muken at ESI Evercore. “The judge’s ruling that AT&T’s increased negotiating leverage with distributors through its ownership of Time Warner will not increase consumer costs in excess of efficiency gains is a positive for CI-ESRX deal approval.”

U.S. District Judge Richard Leon’s decision to reject the Department of Justice’s opposition to the AT&T – Time Warner deal removes a big barrier for similar vertical mergers like the Cigna – Express Scripts deal, and makes it much harder to see how it wouldn’t go through.

This makes ESRX an even more attractive stock to hold.

Express Scripts (NASDAQ: ESRX)

You may not know much about pharmacy benefit manager (PBM) Express Scripts, but the company is the largest PBM in a fast-growing—though tough—field.

In March, Cigna unveiled an agreement to acquire Express Scripts in a cash and stock deal valued at roughly $67 billion, suggesting a stock value for ESRX in the low-$90 range, or around 10% higher than today’s prices at $82.

One reality about the company is that it is in a tough business that is facing similar secular headwinds as the pharmaceutical space has been facing recently. However, even if the deal fails, Express Scrips stands to get a $2.1 billion breakup settlement from Cigna which the company would likely use to buy back stock at attractive valuations.

“Express Scripts trades for a high-single-digit price-to-earnings multiple, which seems cheap given that it is the largest PBM. But deal approval now seems far more likely after the AT&T – Time Warner decision,” said fund manager Colin McWey.

With the acquisition likely to be approved by regulators, the CI – ESRX deal is a low-risk merger, and there’s plenty of upside to be had by buying ESRX now in anticipation of the deal going through – likely this year.

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