雅虎香港財經 Here’s Why CVS Health Corporation (CVS)’s Acquisition of Oak Street Health Doesn’t Make Sense
Greenlight Capital, an investment management company, released its first-quarter 2023 investor letter. A copy of the same can be downloaded here. The fund returned (1.3%), net of fees and expenses, in the first quarter compared to a 7.5% return for the S&P 500 Index. Furthermore, the longs gained 9.9%, while its shorts lost 10.8% and macro lost 0.4%, net of fees and expenses during the quarter. In addition, please check the fund’s top five holdings to know its best picks in 2023.
Greenlight Capital highlighted stocks like CVS Health Corporation (NYSE:CVS) in the first quarter 2023 investor letter. Headquartered in Woonsocket, Rhode Island, CVS Health Corporation (NYSE:CVS) is a health services provider that operates through Health Care Benefits, Pharmacy Services, and Retail/LTC segments. On May 02, 2023, CVS Health Corporation (NYSE:CVS) stock closed at $72.76 per share. One-month return of CVS Health Corporation (NYSE:CVS) was -6.42%, and its shares lost 27.65% of their value over the last 52 weeks. CVS Health Corporation (NYSE:CVS) has a market capitalization of $93.12 billion.
Greenlight Capital made the following comment about CVS Health Corporation (NYSE:CVS) in its Q1 2023 investor letter:
“Second, we will discuss Oak Street Health (OSH), which we closed out after costing us 0.8% (net) during the quarter. CVS Health Corporation (NYSE:CVS) is buying OSH for $39 per share, or about $10 billion. When shorting, there is always the risk that someone with deep pockets will buy out the company at a silly price, or maybe even at twice a silly price. CVS is worth $115 billion (or it was the day they announced the deal; subsequently, CVS’s shares have fallen and it’s now worth $93 billion), so it can afford to piss away $10 billion.
OSH is in value-based care, which has become a trendy segment of the market. Most of the “value” comes from doing a more thorough and aggressive job of documenting how sick a patient is, so as to maximize Medicare payments. OSH operates 169 clinics (costing between $1.5-$2 million to build) in mostly lower income neighborhoods and employs 600 doctors. CVS projects that in 2026 the pro forma entity will have 300 clinics and “embedded EBITDA” of $2 billion, plus over $500 million of synergies.
In 2022, OSH generated less than $1 million of adjusted revenue per doctor2 and lost $500 million (almost $3 million per clinic). Even if it triples the number of doctors by 2026, it will need over $1 million of “embedded EBITDA” per doctor, implying margins shifting from a loss to nearly 100%. Obviously, this can’t happen, as the doctors need to be paid and there are other substantial costs. The amazing thing is that when rumors of this deal circulated, we reached out to CVS management and had a call where we walked them through the math… and they went ahead with the deal anyway. When the proxy came out, it revealed that OSH conducted an auction and, like a late-night eBay shopper who had one too many glasses of wine, CVS raised its uncontested bid several times... Rant over.”
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CVS Health Corporation (NYSE:CVS) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 70 hedge fund portfolios held CVS Health Corporation (NYSE:CVS) at the end of the fourth quarter which was 67 in the previous quarter.
We discussed CVS Health Corporation (NYSE:CVS) in another article and shared the list of cheap reliable stocks to buy. In addition, please check out our hedge fund investor letters Q1 2023 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
