Walmart's Reported Talks With Humana 'Fairly Unsurprising,' Says BMO

Walmart Inc WMT is reportedly in talks with Humana Inc (NYSE: HUM) to explore a deepening of their relationship, including a potential outright acquisition. The talks between the two companies may have caught some investors by surprise, but this shouldn't have been the case, according to BMO Capital Markets. 

The Analyst

BMO Capital Markets' Matt Borsch maintains an Outperform rating on Humana's stock with an unchanged $320 price target.

The Thesis

Talks between Walmart and Humana are "fairly unsurprising" and could be seen as a reaction to CVS Health Corp CVS's proposed acquisition of Aetna Inc AET and CIGNA Corporation CI's proposed acquisition of Express Scripts Holding Co ESRX, Borsch said in a Monday note.

Given the two prior deals that were proposed, Walmart faces potential antitrust challenges given the "scope of possible consolidation" in the industry, the analyst said. 

A merger of the two companies boasts similar strategic rationales to the CVS-Aetna deal, the analyst said. Walmart could be looking to leverage a national retail footprint to deliver lower-cost care delivery sites across many markets, he said. 

In the meantime, Walmart's 10-year relationship with Humana has been successful with their co-branded and co-managed Medicare drug plan offering, Borsch said.

"With a shared focus on the growing senior population, that partnership could possibly be a whole lot more." 

It should be noted that although a potential Walmart-Humana tie-up looks like the CVS-Aetna deal, it is still a new and unproven model which seems "a bit cart before horse," Borsch said. The first step of the deal would be to merge the two companies, followed by creating pilot projects to "figure out" if the merger made sense in the first place, the analyst said. 

Elsewhere On The Street

Stifel's Mark Astrachan said in a research report a deal would be modestly accretive to Walmart's earnings and additive to store traffic.

Morgan Stanley's Simeon Gutman said in a research report that a tie-up between two companies could be "mutually beneficial."

Price Action

Shares of Walmart were trading lower by 4.38 percent at the time of publication Monday afternoon, while Humana's stock was higher by 4.14 percent. 

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