CVS Health to Acquire Oak Street Health – Merger Arbitrage Mondays

In a surprising move last week, CVS Health (CVS) announced its second multi-billion dollar acquisition within a span of 5 months. The company entered into a definitive merger agreement to acquire Oak Street Health (OSH) for $10.6 billion, representing a premium of 72.8% to Oak Street’s price on January 9, 2023, the day Bloomberg reported on CVS Health’s proposed acquisition of Oak Street.

Oak Street Health (OSH)

Headquartered in Chicago, Illinois, Oak Street Health is a healthcare services provider. It was launched in 2012 and went public in 2020. With 169 senior-focused medical centers across 21 states, the company employs over 600 primary care providers and specializes in treating Medicare Advantage patients.

Karen Lynch, CEO of CVS Health laid out a strategic vision for the company at the end of 2021, to expand beyond pharmacy services and enhance its health services in home health, primary care, and provider enablement. The company’s acquisitions of Signify Health (SGFY) and Oak Street Health (OSH) are part of this strategic vision.

On September 5, 2022, CVS Health entered into a definitive agreement to acquire Signify Health (SGFY) for $8 billion. The deal has been facing regulatory issues, with both parties receiving a second request from the DOJ.

The health insurance unit of CVS has been facing challenges, due to the end of a major pharmacy benefit management contract and from lower ratings on its Medicare Advantage insurance plans. The deal comes at a time when focus on primary healthcare and urgent delivery care is on the rise post the Covid-19 pandemic.

Rivals of CVS Health, like Walgreens Boots Alliance (WBA), Cigna (CI), Humana (HUM), Walmart (WMT), and Amazon (AMZN), have also been expanding into home health and primary care providers. Amazon is currently in the process of acquiring 1Life Healthcare (ONEM), a deal that trades at a significant 19.36% spread. It is therefore not surprising that the Oak Street deal also trades at a spread of 10.36%. According to BTIG analyst David Larsen,

“With a primary care business, as well as in-home evaluations solutions with Signify and a retail presence, CVS Health is becoming one of the most dominant forces in healthcare services.“

Rumors of Oak Street’s potential acquisition by CVS Health had been doing the rounds for several weeks before the deal was finally announced last week.

Under the terms of the agreement, CVS Health will acquire Oak Street Health in an all-cash transaction at $39 per share. This acquisition is expected to add about 600 physicians and nurse practitioners and Oak Street’s network of 169 senior-focused clinics to the services provided by CVS.

“Combining Oak Street Health’s platform with CVS Health’s unmatched reach will create the premier value-based primary care solution,” said CVS Health President and CEO Karen S. Lynch. “Enhancing our value-based offerings is core to our strategy as we continue to redefine how people access and experience care that is more affordable, convenient and connected.”

As with Signify Health, this deal will also face regulatory issues. American Economic Liberties Project, a nonprofit antitrust advocacy group has already opposed the deal, stating that the FTC should immediately seek to block a potential transaction.

According to the press release,

‘By 2026, Oak Street Health will have over 300 centers, each of which has the potential to contribute $7 million of Oak Street Health Adjusted EBITDA at maturity, representing more than $2 billion of Oak Street Health embedded Adjusted EBITDA at that time. Additionally, CVS Health projects more than $500 million in synergy potential over time, enhancing CVS Health’s long-term adjusted operating income growth.’

Under the terms of the merger agreement, in case of termination, Oak Street will have to pay a termination fee of $300 million and CVS Health will have to pay a termination fee of $500 million.

Merger Arbitrage activity increased last week with five new deals announced, and two deals closing. Three of the five new deals announced were healthcare deals.

You can find all the active deals listed below in our Merger Arbitrage Tool (MAT) which automatically updates itself during market hours.

Merger Arbitrage

Deal Statistics:

New Merger Arbitrage Deals:

1. The acquisition of Oak Street Health (OSH) by CVS Health (CVS) for $10.6 billion or $39 per share in cash. We added OSH as a potential deal to the Deals in the Works section on January 9, 2023, and the price after the news of the potential deal came out was $22.57.
2. The acquisition of Argo Group International Holdings (ARGO) by Brookfield Reinsurance (BNRE) for $1.1 billion or $30.00 per share in cash.
3. The acquisition of Cardiovascular Systems (CSII) by Abbott (ABT) for $671.63 million or $20.00 per share in cash.
4. The merger of NuVasive (NUVA) with Globus Medical (GMED) for $3.97 billion in an all stock deal. Under the terms of the agreement, shareholders of NuVasive will receive 0.75 of a share of Globus Medical Class A common stock for each share of NuVasive common stock.
5. The acquisition of Sumo Logic (SUMO) by Francisco Partners for $1.1 billion or $12.05 per share in cash.

Deal Updates:

1. On February 2, 2023, Chiesi Farmaceutici filed with the German FCO for its proposed acquisition of Amryt Pharma (AMYT).
2. On February 3, 2023, Chiesi Farmaceutici filed with the Austria Federal Competition Authority for its proposed acquisition of Amryt Pharma (AMYT).
3. On February 3, 2023, The Chile FNE disclosed that it has commenced its formal review of Fairfax Financial Holdings Limited’s proposed acquisition of Atlas Corp. (ATCO).
4. On February 7, 2023, the ‘go-shop’ period for Duck Creek Technologies (DCT) expired.
5. On February 7, 2023, First Brands Group and Horizon Global Corporation (HZN) announced the expiration of the tender offer. The deal is expected to be completed on February 8, 2023.
6. February 8, 2023: Volta (VLTA) and Shell (SHEL) made the necessary filings with the FTC and the DOJ on January 25, 2023. The applicable waiting period under the HSR Act is scheduled to expire on February 24, 2023. Shell, with Volta’s cooperation, made the necessary filings with the French Ministry of the Economy regarding the French FDI approval on January 31, 2023.
7. On February 9, 2023, F-star Therapeutics (FSTX) and invoX Pharma extended the tender offer to February 22, 2023, unless further extended. The purpose of the extension is to provide additional time for the Parties to complete their negotiations with CFIUS on the definitive terms of a mitigation agreement.
8. February 9, 2023: TD Bank Group (TD) and First Horizon Corporation (FHN) announced that they have mutually agreed to extend the outside date of their proposed transaction from February 27 to May 27, 2023.
9. On February 10, 2023, JetBlue (JBLU) set February 22, 2023, as the record date for the February 2023 prepayment to Spirit (SAVE) stockholders of $0.10 per Spirit share, with payment of the February 2023 Additional Prepayment to occur on February 28, 2023.
10. On February 10, 2023, Elevate Credit (ELVT) announced that independent proxy advisory firms ISS and Glass, Lewis & Co. have each recommended that stockholders vote “FOR” the previously announced all-cash acquisition of the company by an affiliate of Park Cities Asset Management LLC.
11. February 10, 2023: According to Reuters, Quebecor Inc is in talks with Rogers Communications (RCI) about cutting domestic rates for Freedom Mobile customers when they roam on the Rogers network. The telecom companies are looking for ways to win the federal industry minister’s approval for Quebecor’s acquisition of Freedom Mobile from Shaw Communications (SJR) as a part of the larger takeover of Shaw by Rogers.

Approvals

1. On February 6, 2023, Opiant Pharmaceuticals (OPNT) announced the expiration of the waiting period under the HSR Act, with respect to the previously announced agreement for Opiant to be acquired by Indivior. Opiant Pharmaceuticals (OPNT) also announced that the Committee on Foreign Investment in the United States (CFIUS) approved the previously announced Merger Agreement for Opiant to be acquired by Indivior.
2. On February 8, 2023, Ancora Holdings Group, which is the beneficial owner of approximately 4% of the outstanding shares of IAA, Inc. (IAA) and 0.5% of the outstanding shares of Ritchie Bros. Auctioneers Incorporated (RBA), released a presentation that details its rationale for supporting the proposed IAA-Ritchie Bros. combination.
3. On February 9, 2023, Shareholders of Apollo Endosurgery (APEN) approved the company’s merger with Boston Scientific Corporation at a special meeting of shareholders.
4. On February 9, 2023, Ipsen announced that the German FCO approved its proposed acquisition of Albireo Pharma (ALBO).
5. On February 9, 2023, Amgen (AMGN) received approval from the German FCO for its proposed acquisition of Horizon Therapeutics (HZNP).
6. On February 10, 2023, Shareholders of Velodyne Lidar (VLDR) approved the company’s merger with Ouster (OUST) at a special meeting of shareholders.

Hurdles:

1. February 6, 2023: According to a New York Times report, Microsoft’s (MSFT) legal team expects the UK’s Competition and Markets Authority will oppose its planned purchase of Activision (ATVI).
2. On February 6, 2023, Luxor Capital Group filed a proxy to oppose the proposed acquisition of IAA, Inc. (IAA) by Ritchie Bros. Auctioneers Incorporated (RBA) at the special meeting of shareholders of RBA scheduled to be held on March 14, 2023.
3. February 6, 2023: According to Reuters, Spirit Airlines (SAVE) expects U.S. antitrust regulators to decide whether to allow the low-cost carrier to proceed with its merger with JetBlue Airways (JBLU) in the “next 30 days or so.”
4. On February 6, 2023, In a letter posted to the FCC docket, Dish Network urged the FCC to deny Cox’s request to strike from its record a portion of the term sheet DISH received from Cox demonstrating that Cox sought to increase retransmission consent fees for TEGNA (TGNA) stations after consummation of the proposed transactions.
5. February 8, 2023: According to The Wall Street Journal, U.K. antitrust regulators said the proposed acquisition of Activision Blizzard (ATVI) by Microsoft (MSFT) would further consolidate what it called Microsoft’s strong position in cloud gaming and said a combination would hurt U.K. gamers, delivering another regulatory hurdle to the deal in a big global gaming marketplace.
6. February 8, 2023: According to Reuters, JetBlue (JBLU) officials are answering questions and giving depositions as the Justice Department presses on with its antitrust review of the company’s plan to buy Spirit (SAVE).
7. February 9, 2023: According to Reuters, Black Knight (BKI) has decided to put its Empower loan origination software business up for sale in an effort to overcome U.S. antitrust concerns over its proposed acquisition by Intercontinental Exchange Inc (ICE).
8. February 10, 2023: According to Reuters, the U.S. Department of Justice is likely to sue to block a pending merger between JetBlue Airways (JBLU) and Spirit Airlines (SAVE).

Closed Deals:

1. The acquisition of Horizon Global Corporation (HZN) by First Brands Group on February 8, 2023. It took 36 days for this deal to be completed.
2. The acquisition of Qumu Corporation (QUMU) by Enghouse Systems on February 8, 2023. It took 51 days for this deal to be completed.

Weekly Spread Changes:

The table below shows weekly spread changes between February 3, 2023, and February 10, 2023.

Top 10 Merger Arbitrage deals with the largest spreads:

Please do your own due diligence on deals with large spreads. Some of these large spreads might be related to regulatory issues or because of the way the deal is structured. We classify some of these deals as “special situation” deals in our merger arbitrage tool and provide additional details to help with the analysis. There may be unique situations related to special dividends, spinoffs, proration, etc. that need to be accounted for when looking at these spreads.

Deals In The Works

Eight new potential Merger Arbitrage deals were added to the ‘Deals In The Works‘ section last week.

1. On February 7, 2023, Reuters reported that  French advertising technology provider Criteo SA (CRTO) is making a new attempt to sell itself after discussions with potential acquirers in previous years proved unsuccessful.

Update

1. Republic First Bancorp (FRBK) reiterated that activist investor George E. Norcross III, Avery Conner Capital Trust, and its trustees refuse to sign a standard non-disclosure agreement to participate in its strategic review process.

SPAC Arbitrage

SPAC IPO

1. On February 9, 2023, Pono Capital Three, Inc. (PTHRU) priced its $100 million IPO.

SPAC Business Combination

1. On February 6, 2023, RealWear, an industrial wearable technology solution company, and Cascadia Acquisition Corp. (CCAI), entered into a definitive business combination agreement that is expected to result in RealWear becoming a publicly traded company.
2. On February 9, 2023, Allurion Technologies and Compute Health Acquisition Corp. (CPUH), entered into a definitive business combination agreement that will result in Allurion becoming a publicly listed company.
3. On February 10, 2023, Refreshing USA, and Integrated Wellness Acquisition Corp (WEL) entered into a definitive agreement and plan of merger.

Completed

1. On February 9, 2023, LanzaTech Global, Inc. (LNZA) completed the business combination with AMCI Acquisition Corp. II (AMCI).
2. On February 10, 2023, Alliance Entertainment Holding Corporation and Adara Acquisition Corp. (ADRA)  completed the previously announced business combination.

Terminated

1. On February 6, 2023, OceanTech Acquisitions I Corp. (OTEC), announced that its previously announced agreement and plan of merger with Majic Wheels Corp. has been terminated by mutual agreement of all relevant parties.

List of all pending Merger Arbitrage deals:

Disclaimer: I have long positions in Activision Blizzard (ATVI), Spirit Airlines (SAVE), Atlas Air Worldwide (AAWW), First Horizon (FHN), Tower Semiconductor (TSEM), TEGNA (TGNA), 1Life Healthcare (ONEM) and CVS Health (CVS). Please do your own due diligence before buying or selling any securities mentioned in this article. We do not warrant the completeness or accuracy of the content or data provided in this article.