Medco Health Solutions (MHS) is up over 3% in what is a flat day for the overall market. After watching it trade and researching some of the commentary about Express Scripts’ (ESRX) proposed buyout of Medco, I’m sending you this Flash Alert to recommend you sell and lock in some nice profits for the second time this week.
As we talked about on the message boards, Express Scripts announced yesterday that it will acquire Medco for a combination of stock and cash. MHS shareholders will receive a little over $28.80 a share in cash and 0.81 shares of Express Scripts stock for every Medco share they own. Based on Wednesday’s closing price of ESRX, the deal is valued at $71.36 a share.
MHS is now trading just under $66. That’s a nice 18% pop in just a couple of days, and the stock has climbed nearly 50% since we added it last September. The reason MHS is trading below the deal price is the same reason I recommend you take profits now: regulatory concerns.
It’s too early to know for sure whether the deal will receive regulatory approval or not, but I do believe there will be significant questioning and possibly outright opposition. A combined Medco-Express Scripts would control a sizable 40% of the pharmacy benefit market, with the number two company, CVS-Caremark, far behind at just 16%. I believe this will cause the Federal Trade Commission some concern.
In addition, the approval process will likely take time, so there is an opportunity cost in holding MHS. We’re better served investing that money in other stocks with bigger upside potential rather than holding Medco for what we know will be another 10% at the most.
Sell MHS and enjoy the nice gains. I’m hard at work on the next monthly issue of GameChangers, and in it, we’ll talk about good opportunities to put that money right back to work. In fact, I have at least one new stock I’m working on right now that I expect to recommend to you.
I’ll talk to you again next week. In the meantime, have a great weekend. We’ve booked a couple of big gains this week in MHS and Westport (WPRT), so consider treating yourself to a nice dinner!