RI would be home to 3rd-largest US company if CVS-Aetna deal goes through

(credit: CVS Health)

WOONSOCKET, R.I. (WPRI) – Rhode Island could soon be home to the third-largest company in the United States if CVS Health’s blockbuster acquisition of insurer Aetna gets the green light from federal regulators.

Woonsocket-based CVS announced Sunday it had struck a deal to buy Aetna for about $69 billion in cash and stock, following weeks of speculation. The proposal must still be approved by regulators and shareholders. CVS said it hopes the transaction – the largest corporate tie-up announced so far in 2017 – will close by the second half of next year.

The combined CVS-Aetna would have about $221.4 billion in annual revenue and nearly 300,000 employees, according to the two companies. Last year the only corporations with more yearly revenue than that were Arkansas-based Walmart, with $486 billion, and Warren Buffett’s Nebraska-based Berkshire Hathaway, with $224 billion, according to the Fortune 500 list.

In an email, CVS spokesman Mike DeAngelis said CVS will remain headquartered in Rhode Island after its takeover of Aetna. CVS reports it now has more than 8,000 workers in the state, including about 5,300 at its headquarters in Woonsocket. That makes it one of the largest employers in Rhode Island, behind only state government and the Lifespan health system, each of which employ well over 10,000.

DeAngelis also suggested the Aetna deal could mean new employment options locally.

“Over the years, we’ve seen career development and job opportunities open up for colleagues following our previous acquisitions of companies including Caremark, Coram and Omnicare, and we would expect similar opportunities to occur following the acquisition of Aetna,” DeAngelis told Eyewitness News.

Gov. Gina Raimondo – who was in Los Angeles on Monday for economic-development and political meetings – was briefed about the proposed merger by CVS CEO Larry Merlo over the weekend, her office said. Merlo is a founding member of the Partnership for Rhode Island, a new CEO group that works closely with the governor’s office.

“If approved, this appears to be a move that would significantly strengthen the positioning of one of Rhode Island’s most important companies and could make health care more affordable and accessible in Rhode Island and across our country,” Raimondo said in a statement.

The stock market reacted coldly to the deal. CVS stock fell about 4.5% to $69 a share in New York Stock Exchange trading Monday. The company’s stock price has dropped sharply over the past 30 months, down from a high of about $112 back in July 2015. Aetna shares also fell Monday.

Aetna will operate as a standalone division of CVS Health and continue to be run by members of its current management team, executives said. The insurer has been based for more than a century in Hartford, Connecticut, but earlier this year announced plans to move its headquarters to New York City. It’s unclear how the merger will affect the relocation.

In a call with investors Monday, Merlo and Aetna CEO Mark Bertolini argued that combining the nation’s second-largest drugstore chain with its third-largest insurer will be beneficial to consumers. They said they envision improved coordination of care and increased access to services.

The reach of the two companies is vast: CVS has nearly 10,000 CVS Pharmacy drugstores and 1,100 MinuteClinics as well as a sizable pharmacy-benefits management business; the company says more than 70% of Americans live within three miles of a CVS. Aetna for its part has more than 22 million members signed up for its insurance plans.

Merlo suggested that CVS would use its retail network as hubs for Aetna members to get information and guidance about their health needs.

“The relationship becomes one of trust,” he said. “What I want to use over and over again, because I think it makes so much simpler, [is] think of a Genius Bar at Apple, for example, and this ability to walk in the store and get help. I think this is the kind of idea we want to create in the stores.”

Merlo said CVS sees some of its biggest chance for future growth in the expansion of programs such as Medicare, Medicaid and the Affordable Care Act. “The real opportunity lies in the government businesses,” he said.

Kevin Hively, a veteran local economic-development consultant, noted on Twitter that if the CVS-Aetna deal goes through, Rhode Island will be home to not only one of the nation’s largest businesses but “a singular force in health care.”

“It’s a unique [opportunity] and a pile of possibilities if RI can get out of its own way,” Hively wrote.

Carl Bogus, a law professor at Roger Williams University, said while the size of the merger is enormous, regulators may not move to block it on antitrust grounds, since the two companies are not direct competitors and executives are arguing it could lower drug prices.

“This not the type of merger that generally deeply concerns antitrust regulators,” Bogus said. “The traditional antitrust doctrine is very much about consumer prices and total industry output,” he added.

CVS and Aetna are promising shareholders there will be significant cost cuts if the merger is approved: executives are eyeing $750 million in “near-term” savings once the combination is official.

Dave Denton, CVS’s chief financial officer, said those savings could come from “streamlining of redundant corporate functions and combining PBM [pharmacy-benefit management] and PPP [pharmacy purchasing and products] operations” as well as “reducing medical costs through improved care management and shifting care to lower-cost settings.”

The first CVS store opened in 1963 in Lowell, Massachusetts, but over time the company’s operations migrated south, and it set up offices in Woonsocket in 1981. From 1969 to 1996 it was a subsidiary of the Melville Corporation. The company’s most transformative merger before the Aetna deal occurred a decade ago, in 2007, when it closed on a $21-billion deal to acquire pharmacy-benefit management company Caremark.

Ted Nesi (tnesi@wpri.com) covers politics and the economy for WPRI.com. He writes Nesi’s Notes on Saturdays and hosts Executive Suite. Follow him on Twitter and Facebook