CVH – Aetna to buy Coventry Health. Confirmation of Model Price.

When a deal is announced I scramble to my model price charts.  The first thing I review is the announced deal price.  What is the deal price in relation to our model price calculation?  See our model price calculation is our definition of fair market value.  So it would make sense that an announced deal would be somewhere around our calculated price.

Why should you care?

Confirming deals, where real money/shares change hands gives our users of model price more confirmation that our model price calculation can be relied upon.  Since I started this blog – back in mid January – M&A activity has been few and far between, however model price was created back in 2002 so we have had 10 years of validation.  After many small Canadian deals, this Aetna deal is the first major US transaction we have had since I have been blogging.  So let’s have a look at Coventry’s model price chart to see what we can observe.

Coventry Health with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

The first observable is our model price calculation of $40.97.  This is very close to the close yesterday, August 20^th, 2012.  Aetna will pay $27.30 in cash and 0.3885 Aetna Common shares for each Coventry share.  So some variance has to be given on how the common shares of Aetna trading subsequent to the announcement of the deal.  Aetna shares rose 4% to $39.59 in midday trading which helped Coventry’s close of $42.04.  So our model price calculation looks good compared to the deal terms.

The second observable is that on four separate times – see arrows, CVH tried to break up through EBV.  On the fifth try, you can observe it did.  To me this signals “insider trading”.  Checking daily price movements, Coventry had a price spike on Thursday, August 16 as you can see from the price chart below.

An interesting point to our readers, that EBV was transited with this nonpublic information.  Transits happen for a reason, which to me foretell fundamentals are changing positively or negatively.  So for users of our model price charts pay heed to transits.