Deal overview
CVS Health, the largest healthcare company in the US has agreed to acquire Oak Street Health in an all-cash deal valued at $10.6 billion. This reflects CVS’s interest in the primary care market, which algins with their overarching M&A strategy, which has resulted in 3 large transactions within the last 6 years. The acquisition of Oak Street Health follows the vertical integration trend in the healthcare industry. CVS aims to expand and consolidate their market share with this transaction, while achieving their commitment to adding 200 basis points of long term adjusted operating income growth.
Deal structure
CVS Health will buy all outstanding shares at $39 per share, resulting in an enterprise value of $106 billion. This represents a 16% premium on the 7th of February closing price, the day before the deal was announced. The all-cash transaction is financed through ‘available resources and existing financial capacity’. The transaction was approved by the Board of Directors at both companies and is expected to be completed in late 2023.
CVS Health was advised by Credit Suisse and Lazard (financial) as well as Shearman & Sterling LLP, Dechert LLP and McDermott Will & Emery (legal). Oak Street Health was advised by Centerview Partners (financial) and Kirkland & Ellis LLP (legal).
CVS Overview
CVS Health is an American healthcare company based in Rhode Island. They provide a wide range of healthcare services including CVS Pharmacy, a retail pharmacy chain, CVS Caremark, a pharmacy benefits manager and Aetna, a health insurer, among other several brands. The retail pharmacy business has more than 9,600 stores across the US, making it the largest pharmacy in the US based on number of locations and market share. In addition, the company also operates 1,100 walk in medical clinics and the pharmacy benefits manager has over 110 million plan members.
Founded: 1963
Number of employees: 300,000
EV: $165.4bn
LTM Revenue: $321.6bn
LTM EBITDA: $19.7bn
Market Cap: $110.1bn
Oak Street Health Overview
Oak Street Health is an American healthcare company based In Chicago. They operate primary care clinics for seniors on Medicare, specialising and leading in the Value-Based Care (VBC) segment. This is a healthcare model in which healthcare providers are compensated based on patient health outcomes, thereby forcing them to focus on the quality of care rather than quantity. Oak Street Health includes around 600 physicians across 169 medical centres located in 21 states, this is expected to grow to over 300 centres by 2026.
Oak Street Health's product and service offerings are focused on delivering high-quality primary care to seniors on Medicare, with a focus on providing personalised, patient-centred care. This includes a range of services such as comprehensive primary care, chronic condition management, and coordination of care with specialists and other healthcare providers. Oak Street Health also offers additional services such as social activities, transportation assistance, and access to community resources to help support patients' overall health and well-being.
Founded: 2012
Number of employees: 5,200
EV: $9.4bn
LTM Revenue: $2.2bn
LTM EBITDA: ($432.7mn)
Market Cap: $8.6bn
Industry Insight
Most major healthcare companies are pursuing ‘vertical integration’, an important trend in the healthcare industry. It would be impossible for a singular company to organically build several different successful businesses therefore healthcare companies have been undertaking pragmatic acquisitions in order to diversify their business lines and increase profits. Vertical integration in healthcare has several benefits to businesses, including cost efficiency, higher revenues and increased market share. In the current macroeconomic environment, healthcare companies have been less willing to invest in new, start-up business models and instead have focused their efforts on scaling up innovative models that are already showing positive results.
Technology and Artificial Intelligence have been increasing disruptive in the healthcare industry. The global artificial intelligence in healthcare market size was estimated at $15.1 billion in 2022 and it is expected to surpass $187.95 billion by 2030, growing at a CAGR of 37% during the forecast period 2022 to 2030. In addition, the Covid-19 pandemic accelerated the adoption of technology in healthcare in order to deliver telehealth and home care. Although demand has fallen since its peak during the pandemic, demand for virtual healthcare is still 20x higher than before the pandemic, which has spurred healthcare companies to innovate in order to meet the demand.
Value-Based Care models have been gaining traction in the US healthcare industry. Policymakers advocate for it as a better alternative to the fee-for-service model, since it removes perverse incentives by shifting from quantity to quality of care. In VBC models, healthcare providers are not compensated for additional services, but instead are paid based on patient outcomes. This creates the incentive to provide greater quality care at a lower cost – improving outcomes across the board. Investment in VBC has soared recently, driven by the astronomical cost of healthcare in the US, where the average cost of healthcare is twice as high as in other developed countries.
Strategic rationale
The acquisition of Oak Street Health enables CVS to enter the rapidly growing Value Based Care segment and therefore capture more customers in the Medicare Advantage market, which is estimated to be worth $350 billion. This is a high profit product for insurers, which CVS will be able to gain from as they acquired Aetna, a health insurance provider in 2017 for $68 billion. In 2021, Medicare Advantage insurers reported gross margins averaging $1,730 per enrolee, at least double the margins reported by insurers in individual, employer and Medicaid managed care market.
The acquisition is expected to offer significant cost synergies and growth potential. Oak Street’s business model, which is back by Canopy, its proprietary technology platform, which determines the optimal care for each patient is value based and highly scalable, which makes it very attractive as an acquisition. The current 169 medical centres are expected to grow to over 300 centres by 2026, enabled by CVS’s capital support and existing real estate. CVS said these offerings will be enhanced by its own community, home health and virtual care abilities. CVS expects the merger to drive more than $500 million in synergy potential over time, improving operating margins and bolstering its long-term growth goals.
Finally, in terms of strategic rationale, the acquisition fits with CVS’s broader M&A and vertical integration strategy. In September 2022 they acquired SignifyHealth ($8 billion) and acquired Aetna in December 2017 ($68 billion). The primary care company fits perfectly within the conglomerate and creates additional opportunities to leverage the customer bases in order to cross sell, for example, directing writing prescriptions to Oak Street’s patients for CVS pharmacies.
Long term prospects
CVS’s long-term prospects following this deal and its other recent acquisitions are extremely positive. Although Oak Street is not currently profitable, by leveraging economies of scale and synergies created in the acquisition, revenues are estimated to reach $1.3 billion by 2028. Moreover, the primary care companies have been in high demand recently, following several high profile transactions including Amazon’s acquisition of One Medical. The market’s reaction to the deal’s announcement was also largely positive with CVS shares rising 4.8%, while Oak Street gained 4.9%. In conclusion, the US healthcare industry is flawed, but is undergoing rapid change. This acquisition puts CVS in an advantageous position to capitalise on these advancements.
Written by Anna Jin (London School of Economics)