CVS's Monster Debt Sale Highlights a Major Deal Problem

(Bloomberg Gadfly) -- It will likely be a while before CVS Health Corp. completes its $68 billion purchase of insurer Aetna Inc. But it's already laying the very expensive groundwork. 

CVS on Tuesday launched one of the biggest-ever corporate-debt sales to fund the merger. All that debt will also form one of the biggest barriers to the union's success.

This deal is more ambitious than most, aiming to remake the U.S. health care sector. That's a tough job, and a $70 billion debt overhang won't make it any easier.

CVS and Aetna had plenty of debt going into the deal, contributing to the enormity of the pair's combined load. The chart below -- an update of one originally produced by my colleague Tara Lachapelle -- gives a sense of the magnitude of the future obligations. The need to service and pay down this debt will be a major constraint on the new company's ability to invest in its business.  

Integrating two businesses that have never before been combined is just the start. The principal benefit of the union will arguably be directing Aetna enrollees to CVS pharmacies and clinics in a way that generates revenue and reduces costs -- but does not alienate customers. 

CVS's in-store clinics will be key to that effort. CVS currently has clinics in 1,134 of its 9,803 retail locations. It must expand that footprint and match it to the geographic distribution of Aetna's enrollees.

And CVS's clinics will likely need to offer substantially more services than they do now. Not only will this make the most of the Aetna deal, it will help defend against the growing threat Amazon.com Inc. poses to its non-pharmacy retail business.

Re-imagining stores and hiring more specialized health-care providers will cost the new CVS a lot of cash. That need will compete with the urge to rein in leverage for the next few years. Meanwhile, existing competitors such as UnitedHealth Group Inc. and emergent rivals such as Amazon's employer health-care venture will not wait quietly. 

The bond market isn't what it was a year ago; debt financing is getting more expensive, and a credit-rating downgrade may loom for CVS. 

I'm largely a fan of this deal from a long-term strategic standpoint. But such a debt pile and its consequences could substantially hamper the success of the combination. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

To contact the author of this story: Max Nisen in New York at mnisen@bloomberg.net.

To contact the editor responsible for this story: Mark Gongloff at mgongloff1@bloomberg.net.

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