Has CVS become too aggressive with M&A?

CVS Health ( CVS 0.98%) has mergers and acquisitions on its mind. Earlier this month, it announced plans to acquire home health company Signify Health for $8 billion, beating out other bids from Amazon and UnitedHealth Group . On a recent earnings call, management at CVS also hinted that it was looking for a deal in primary care to expand its services further.

And CVS may have already found a company to fulfill that goal amidst rumors of another acquisition, possibly setting up another bidding war. CVS looking to buy Cano Health?

According to a report from the Wall Street Journal , Cano Health ( CANO 1.73%) is the next company in CVS’ crosshairs. Cano Health is a provider of value-based care, with the bulk of its revenue (87%) coming from Medicare. Although Cano’s business has been growing of late, its bottom line has struggled to stay out of the red. Cano’s day-to-day operating activities have also burned through $152.6 million in cash over the trailing 12 months. So while this wouldn’t be a business that would instantly be accretive to CVS’ bottom line, it could certainly go a long way in helping expand into primary care. As of June 30, Cano Health had 143 medical centers, operating in nine states and Puerto Rico.

The healthcare company went public through a special-purpose acquisition in 2020. But with risky growth stocks coming under pressure this year, Cano’s stock plunged, and it was down 58% before investors learned of the rumored deal. With a market cap of $4.3 billion, Cano would likely fetch a lower price than what CVS paid for Signify.

CVS can easily afford to buy Cano Health, with the healthcare company having $15 billion of cash and short-term investments on its books as of the end of June. But this time around, having the highest bid may not be enough for it to close the deal. Humana has the inside edge

Among the companies vying for Cano Health is health insurance provider Humana ( HUM 1.33%). The two companies have a history and have worked together in Florida, with Cano Health providing services to Humana’s Medicare Advantage patients there in 2021. Cano also has a “roadmap to opening new Humana-funded medical centers in the southwestern U.S. by 2024.”

In addition, Humana has the right of first refusal involving any sale of Cano Health, stemming from an agreement reached between the companies back in 2019. So unless it’s willing to pass up the opportunity to acquire a company it has worked with so closely over multiple years, CVS may not be able to acquire Cano Health.

Either way, a resolution could come quick as The Wall Street Journal says that “talks are serious and a deal to purchase Cano could be struck in the next several weeks.” Is this a good sign for CVS investors?

Whether CVS ends up acquiring Cano Health or not, the key takeaway here is that CVS is serious about M&A and isn’t looking to stand by as valuations are declining in this bear market . Usually, I’d be wary of a company that’s aggressive in pursuing acquisitions, but CVS is taking the actions that all investors should be considering right now — finding quality businesses cheaply and investing in them. It makes a lot more sense to buy up companies at depressed valuations since it’ll mean less of an outflow of cash for the buyer and thus lead to a better deal for the company.

Whether it’s Cano Health or another primary care provider, CVS is making moves that align with its strategy, helping diversify its business in the long run. That makes the company a better buy in the end. Pursuing acquisitions at a time when values are down is a smart move for CVS, and it’s not breaking the bank on companies with high market caps that could drastically impact the attractiveness of its stock.

Overall, this is good news for CVS investors as the business should become stronger and more diversified once it lands a deal for a primary care provider. Should you invest $1,000 in CVS Health Corporation right now?

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source CVS Is in Another Bidding War

editor Stocks

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