Health Insurance: New Front in Walmart Vs. Amazon?

News broke late Thursday that Walmart Inc. (WMT) the world's largest retailer, is in preliminary talks to acquire health insurance giant Humana Inc. (HUM), as first reported by The Wall Street Journal, citing sources familiar with the matter. 

The deal would represent the Bentonville, Arkansas-based retail chain's largest acquisition by far and comes amid a wave of consolidation as traditional industry leaders react to any potential Amazon.com Inc. (AMZN) play in the drug supply chain and the broader health care space. (See also: Why Amazon's Stock Will Rise 15% Even Amid Grocery Price Wars.)

Traditional industry leaders have been on the offensive as Amazon pushes into health care and brick-and-mortar retail. CVS Health Corp.'s (CVS) decision to buy Humana rival Aetna Inc. (AET) for $69 billion, announced in December, was followed by Cigna Corp.'s (CI) announcement in March to acquire Express Scripts Holding Co. (ESRX) for $67 billion, including debt.

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After the Seattle-based e-commerce and retail giant bought Whole Foods Market for $13.7 billion, its introduction of branded hardware into its stores led many on the Street to suggest that it would eventually add pharmacies inside its hundreds of new physical locations. In a move seen as posing a significant disruptive threat to the health care space, Amazon announced a partnership with Warren Buffett's Berkshire Hathaway Inc. (BRK.A) and JPMorgan Chase & Co. (JPM) to form a joint health care venture, set to reduce costs for employees. 

On Friday, Leerink Research analysts, who have a $325 12-month price target on HUM stock, implying a 20% upside from recent levels, issued a research note indicating that Walmart would have to pay an even-larger premium for the insurer. Pricing in a 30% to 40% premium over Humana's current price, analysts see the potential value of the deal as close to $50 billion, at a share price of $360. 

Walmart's willingness to pay a premium is driven by the firm's need to combat Amazon, whose deep pockets, enormous scale and massive global consumer base allow it to pummel into new markets, even accepting short-term losses in exchange for longer-term prospects. A deal with Humana, in which Walmart already partners with on Medicare prescription fulfillment, could offer the retail behemoth access to both a greater number of shoppers and a trove of data that could help it better target consumers. (See also: What's Behind Cigna's $67B Express Scripts Buy?)