How about if I offered you a 60%-80% chance of making $15 and said that if you were wrong you'd get almost all of your money back?
Pretty good deal. Well that's what you're buying with Medco Health (MHS) right now.
Medco has a deal in place to be bought by ExpressScripts (ESRX) , one of three other players in the business of running drug distribution for health plans. The business is that these companies negotiate for the best prices, handle the back-end paperwork, and send out the prescriptions.
It's drawing some serious opposition, aimed at the FTC, Congress, and the states. Local pharmacists like mine hate it because it could drive them out of business. Even Walgreen (WAG) sees it as a threat.
All this caused Leerink Swann healthcare analyst David Larsen to lower his odds of the deal getting done to 60%. Most analysts still give it an 80% chance of going through. ExpressScripts insists it is in a better bargaining position with drug firms if it wins, and given Medicare and VA success in keeping down prices it might be right.
Still, we're talking about $28.80 in cash and 0.81 shares of ExpressScripts, currently selling at about $38.80 per share, or a stock currently priced at $47.30. That's $60.22 on a $47.30 investment. Play it with options and your leverage is increased.
The price of ESRX when this merger was announced was $55.35. The price of Medco was over $64. I call that downside protection.
Yes, there might be some conditions attached to the deal. No problem, you'll be out before those take effect.
This looks like easy money. And you're in better shape getting in now than you would have been getting in when the merger was announced.