Express/Medco deal is antitrust roll of the dice

July 21, 2011

By Robert Cyran
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

NEW YORK — Express Scripts’ $29.1 billion cash and stock offer for Medco Health Solutions isn’t just one of the largest deals of the year — it’s a massive antitrust roll of the dice. The combination would create a kahuna in the pharmacy benefits management (PBM) industry. So much so, it looks like a provocation to trustbusters.

The healthcare middlemen pool customers, using their heft to negotiate discounts from drug makers, while pocketing a portion. Express says the combo will yield $1 billion of synergies. That’s believable — though they have similar EBITDA, Express runs a much tighter ship with around half as many employees.

The big savings explain the 5 percent bounce in Express’s share price, which in turn boosted the value of its offer to around $73.66 per Medco share. But the regulatory hurdles that need to be jumped also explain why Medco shares are trading at around a relatively large 14 percent discount to the implied bid price.

Convincing the Federal Trade Commission the deal will not lessen competition won’t be a cinch. The group will have about 35 percent of the market, Deutsche Bank estimates. When Express tried to buy Caremark four years ago — and the sector was more fragmented — Caremark’s defense was that a deal couldn’t fly in Washington.

Even Express and Medco don’t seem especially confident a deal can pass muster: they took the unusual step of waiving break fees if the merger fails to receive government approval. Even AT&T is promising to pay a break fee if regulators nix its takeover of T-Mobile, which will give it 44 percent of the mobile phone market.

That difference aside, Express is borrowing AT&T’s tactics. For example, Express says the combination won’t harm consumers partly because Medco itself has some serious flaws. Namely, it points out that UnitedHealth Group UNH.N, one of the largest U.S. health insurers, declined to renew a contract that accounts for more than 15 percent of Medco’s revenue. UnitedHealth will do the job itself — an example, Express argues, that the market is becoming more, not less, competitive.

Perhaps, but regulators will want greater assurances that a more dominant Express-Medco will pass some of its efficiencies on to customers, not just shareholders. Either way, Wall Street’s warm reception highlights how much is at stake in the deal. Expect Express to fight hard, notwithstanding the difficult nature of its objective.

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