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.
“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.