retail news in context, analysis with attitude

Last Friday, MNB took note of a Wall Street Journal report that Walmart, the biggest retailer in the world, is in “preliminary” discussions to acquire Humana, a health care serves company with a $37 billion market value. Such a deal “would mark a dramatic shift for the retail behemoth and the latest in a recent flurry of big deals in health-care services … A Walmart-Humana deal would cap a series of transactions that could transform the business of managing health care.”

Fortune has a story about “how central one key demographic is to this seemingly out-of-the-box M&A move - and that’s the prodigiously sized generation of Medicare recipients.”

Consider this: “A whopping 79% of Humana’s total premiums and services revenue comes from Uncle Sam - through individual and group Medicare Advantage plans and other stand-alone prescription drug plans, according to the company’s latest 10-K filing with the SEC … Humana offers at least one type of Medicare plan in each of the 50 states.”

Talk about synergy: “That same silver-domed demo, of course, is core to Walmart: Millions of seniors not only shop at its stores but also pick up their scrips there, too. The world’s largest employer (after the U.S. Department of Defense and the People’s Liberation Army) also just happens to be the 4th largest operator of pharmacies in the U.S., with $20.6 billion in 2016 prescription drug sales, according to Pembroke Consulting … That makes Walmart-the-drug-chain bigger than Rite Aid.”

Fortune goes on: “Like CVS, Walmart has been energetically incorporating primary care clinics in many of its stores too. (That’s a direction Humana had been heading as well: It has nearly 200 clinics that it operates on its own or in joint ventures, according to Modern Healthcare.) The idea of combining these resources—and encouraging Humana plan members to get their primary care through Walmart clinics, get their meds through Walmart pharmacies, and shop in the healthy fruit and veggie aisles at Walmart groceries—makes good, simple sense.”

But there are complications.

The Wall Street Journal says that a move by Walmart to acquire Humana would force the company “to borrow tens of billions of dollars - or issue millions of shares, which could push the founding Walton family’s ownership stake below 50%.” While it is the biggest retailer in the world, and is controlled by one of the world’s richest families, it doesn’t have a lot of cash on hand - the company “ended its fiscal year in January with $6.76 billion in cash and short-term investments.”

Such an acquisition, then, could force the Walton family to make a kind of existential decision about the company’s future.

The New York Times writes that some people familiar with the discussions feel that an alliance is more likely than an acquisition: “Walmart and Humana already have some synergistic ties. Since 2010, they have sold a co-branded prescription drug benefit for Medicare recipients, which offers savings on certain drugs bought at Walmart’s pharmacies.
The two companies, one of the people briefed on the matter said, are discussing how to expand that partnership in ways that would help drive more traffic to Walmart’s 4,700 United States stores, while increasing Humana’s enrollment.

“As part of that initiative, analysts said, Walmart could open urgent care clinics inside its stores or hold community events, like bingo nights, that cater to enrollees in Humana’s insurance plans.”
KC's View:
I’m sure this could be a nightmare in a lot of ways, but there remains the possibility that Walmart actually could deliver better health care coverage to consumers because it will challenge traditional business methods.

I would guess that we’ll see a multi-million-dollar lobbying campaign on behalf of the traditional health care business, which will see this as an enormous threat. They’ll take a p[age from the playbook used by financial services companies that have successfully prevented Walmart from buying a bank.