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New Cigna bonds look cheap relative to CVS
admin | September 7, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
Cigna issues debt to fund acquisition
Cigna Corporation (CI) tapped the market this week for $20 billion to fund its acquisition of Express Scripts Holding Co. (ESRX). The deal was the second largest U.S. corporate bond deal this year after CVS’ benchmark deal to help fund its acquisition of Aetna. The 10-part deal was issued out of Halfmoon Parent Inc., which is currently a wholly-owned subsidiary of CI and will be the new ultimate parent of the combined enterprise upon close of the acquisition. Halfmoon is expected to be rated Baa1 (*-)/A- (negative outlook)/BBB (stable outlook). Given the attractive initial price talk (see chart below), the order book grew to over $67 billion. As price talk was tightened, roughly $4 billion in orders dropped.
Exhibit 1: Cigna $20 billion jumbo deal to fund Express Scripts acquisition
Source: Bloomberg
Special Mandatory Redemption language
As with similar deals to fund acquisitions, all bonds with the exception of the 30-year tranche contained Special Mandatory Redemption (SMR) language. The SMR language requires CI to redeem the bonds at $101 plus accrued and unpaid interest if the transaction is not consummated on or before September 4, 2019. The SMR language may not be worth much.
On September 5th the Wall Street Journal reported that antitrust enforcers at the Justice Department looked set to approve the Cigna–Express Scripts deal within the next few weeks. But unlike CVS’ acquisition of Aetna, the government may not require Cigna to sell off any assets in order to gain approval.
This should enable CI/ESRX deal to comfortably close by year-end, and within management’s original guidance from when it was announced back in March 2018.
Relative value
The CI/ESRX combination brings together an HMO and a PBM. The combined entity will look similar to CVS/Aetna, less the retail component. This makes CI/ESRX more of a pure play healthcare company with pro forma leverage post close of roughly 3.3x – over a turn less than the expected 4.6x leverage at CVS/Aetna post close. Both CI/ESRX and CVS/Aetna will gradually delever, however CVS/Aetna will not consider any share buybacks until leverage hits the low 3.0x area, while CI/ESRX can prioritize debt repayment while continuing to deploy capital to shareholders. Given the better leverage and lack of retail, we believe the new Cigna bonds should settle about 5 to10 bp through comparable CVS issues. The new 10-year Halfmoon bonds look to be the most attractive, trading around the +149 bp area, roughly 5 bp behind CVS 4.3% 3/25/28.
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