Walmart Inc (NYSE: WMT) stock dropped more than 3 percent on Monday as speculation swirls about the retailer’s potential buyout of health insurance giant Humana, Inc. ( HUM).
Walmart investors seem a bit underwhelmed by the prospect of a union, but analysts say Walmart and Humana are a powerful team even without a merger.
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CNBC reported that Walmart and Humana have had early-stage talks about strengthening their partnership, including a possible merger. With a potential price tag approaching $50 billion, a Humana buyout would be the largest acquisition Walmart has ever made.
However, the health care industry has been shifting to a more consolidated look in recent months in light of several other blockbuster deals. In December, CVS Health Corp. ( CVS) announced a $69 billion buyout deal for Aetna ( AET). Walmart’s prime retail competitor, Amazon.com ( AMZN), also recently announced a new health care collaboration with J.P. Morgan Chase & Co. ( JPM) and Berkshire Hathaway ( BRK.A, BRK.B).
The threat of Amazon and other competitors entering the health care business has put pressure on Walmart to respond, but making such a massive acquisition could create challenges for a company which is already heavily investing in online sales and delivery initiatives.
“We believe an outright acquisition would be modestly accretive to Walmart earnings and potentially additive to store traffic, though would also meaningfully increase business complexity and risks,” Stifel analyst Mark Astrachan says.
Instead of a buyout, Astrachan says a slightly less aggressive approach of Walmart expanding its current prescription drug partnership with Humana might be a more prudent move for Walmart.
“We view this as a more favorable near-term option in that it would allow Walmart to learn more about the healthcare industry, and likely include closer ties that could add to Walmart’s store traffic while also potentially reducing costs,” Astrachan says.
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If Walmart instead decides to pull the trigger on a buyout, Morgan Stanley analyst Simeon Gutman says Walmart investors should expect further negative market reaction in the short term.
“Investors may question whether WMT would have too many balls in the air at a time of meaningful change, or if WMT is trying to deflect attention away from e-commerce,” Gutman says. Nevertheless, Morgan Stanley sees a potential deal as a long-term positive for WMT stock.
Morgan Stanley has an “equal-weight” rating and $99 price target for Walmart. Stifel has a “hold” rating and $99 target for WMT stock.
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Walmart Inc (WMT) Has a Huge Opportunity With Humana originally appeared on usnews.com
