A Review of the Regulatory Hurdles Remaining for the CVS Aetna Acquisition

As CVS Health (CVS) continues to tout its Aetna acquisition as a big part of the company's future and as an additive aspect to results, it's important to note the remaining hoops left to jump through.

While the deal was approved in the fall, the initial green light was not a final say.

As those following the deal will recall, U.S. District Judge Richard Leon asked to hear from select witnesses before deciding whether or not to to sign off on the acquisition sent through by the Department of Justice.

The main sticking point is whether or not the deal would violate the Antitrust Procedures and Penalties Act, or Tunney Act, as has been argued by medical associations and consumer protection agencies decrying the acquisition. At least seven witnesses have come forward, according to court filings, to present arguments about the harms to competition and Medicare coverage such a deal would present.

CVS sought to quickly quell the arguments, responding in a motion to exclude the testimony of the amici in a court filing last week on the grounds that the Tunney act is not applicable.

"Such evidence and arguments are irrelevant to the proposed Final Judgment and threaten to turn this Tunney Act proceeding into a forum for airing competitors' grievances about the CVS-Aetna merger and about the healthcare industry more generally," CVS argued. "That is not what Tunney Act review is for."

"In light of Amici's witness list submissions, CVS also respectfully suggests that the Court should exercise its discretion to dispense altogether with an evidentiary hearing with live witness testimony," CVS' argument added. "Amici's submissions demonstrate that such a hearing is unnecessary in light of the considerable record already before the Court, and Amici's planned presentations, consisting almost exclusively of unreliable competitor testimony on issues that are not relevant to the Court's Tunney Act determination, will add little, if anything, of value."

The DOJ was inclined to agree, filing its own response to the challenge on Monday.

"Much of the testimony proposed by the American Medical Association, AIDS Healthcare Foundation, and Consumer Action and U.S. PIRG is beyond the statutory

scope of Tunney Act review and is otherwise inadmissible in an evidentiary hearing of the kind currently proposed," a statement reads. "Specifically, the proposed testimony relating to alleged antitrust violations that amici believe the United States should have included in the Complaint is beyond the scope of the public-interest inquiry before the Court and is therefore irrelevant. Consequently, it should be excluded. Much of the opinion testimony offered by amici is also inadmissible or unsupported. It, too, should be excluded."

As such, the leaner testimony is unlikely to significantly impact the deal.

"While we believe a full on rejection of the merger to be highly unlikely and question how much, if any, influence Judge Leon has to contradict the Justice Department's ruling, we think it is a scenario worth considering as it allows to better quantify the result of a worst-case outcome," TheStreet's Action Alerts PLUS team advised. "Should this be the case, we would essentially be back at step one, with CVS being strictly a pharmacy, PBM, retail operation without the added synergies and verticals provided by Aetna."

Considering Aetna was at the forefront of the earnings call on Wednesday, that scenario only looks worse.

On the bright side, all of the debt amassed by CVS in the blockbuster deal would be shed and CVS would be a low-multiple stock with a strong balance sheet, especially considering a stock slide would be anticipated if such a deal would fall through. Furthermore, retail operations in the domestic-focused company appear to be quite strong. In total, the company would recoup $45 billion plus an $8 billion breakup fee from Aetna, a recall of nearly 275 million shares, and regain some of the cash spent on the deal. The risk of integrating Aetna would also evaporate as an overhang.

In the end, the worst case is really not the worst thing that could happen, unlikely as it is.

"While we are aware of the overhang on the stock resulting from Judge Leon's insistence on hearing live testimony, we do not believe it poses any additional risk to the downside and continue to view shares as deeply undervalued regardless of the outcome," Action Alerts reasoned. "We therefore reiterate our One ["Buy"] rating and will continue to look for material weakness as a means to reduce basis and increase our position as we continue to be of the mind that the Aetna integration will take place and the longer-term outlook of the company will be much brighter as a result."

For the team's full investment outlook on their CVS position after the earnings release, click here.

(CVS Health is a holding in Jim Cramer'sAction Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells this stock? Learn more now.)

Employees of TheStreet are restricted from trading individual securities.

Action Alerts PLUS, which Cramer manages as a charitable trust, is long CVS.