US health insurer Aetna Inc. said it would buy smaller rival Humana Inc for about $37 billion (Dh135.8 billion) in cash and stock, in the largest deal in the insurance industry. The combination will push Aetna close to Anthem Inc’s No 2 insurer spot by membership, and would nearly triple Aetna’s Medicare Advantage business.

Aetna said it would pay Humana shareholders $125 in cash and 0.8375 Aetna shares for each share held. The offer of about $230 per share is a 23 per cent premium to Humana’s closing price on Thursday.

Following the deal, Aetna shareholders would own about 74 per cent of the combined company with Humana shareholders owning the rest. Aetna Chief Executive Mark Bertolini will serve as chairman and CEO of the combined company. The deal is expected to close in the second half of 2016 and add to operating earnings per share from 2017.

Aetna said it has received commitments from Citi and UBS Investment Bank to finance the deal.

Obamacare ruling

The deal will face antitrust scrutiny but if it goes through it would dwarf the previous largest insurance deal announced just this week, where Swiss property and casualty giant ACE Ltd announced it was buying Chubb Corp for $28 billion. It would also dwarf Anthem Inc’s purchase of WellPoint in 2004 for $16.6 billion.

Analysts have said that M&A activity in the health care sector had been waiting for the outcome of last week’s Obamacare ruling, which upheld key subsidies that underpin the reform and thus gave more certainty to health care insurers. The bigger the insurer, the more power it has negotiating prices and improving its doctor networks.

Anthem has offered to buy Cigna Corp to create the largest insurer in the country, toppling UnitedHealth Group Inc Media reports have also said UnitedHealth could be eyeing Cigna and Aetna. On Thursday, Centene Corp said it would buy smaller rival Health Net Inc for $6.3 billion.

Antitrust authorities are expected to scrutinise how the combination of insurers will affect competition for each line of insurance: Medicare, Medicaid for the poor, individual insurance, commercial insurance for small and large businesses and the large employer business.

Wall Street analysts and some antitrust experts have said they expect the combination will be approved, although regulators may ask for some divestitures. Others have said it is unclear that this group of regulators will stick to the usual review playbook for such a large deal and may add other restrictions.

Operating revenue

The Justice Department, which reviews insurance mergers, will scrutinise deals city-by-city to see if the combination would have a monopoly in any metropolitan area, said Andre Barlow, a veteran of the department who is now at Washington law firm Doyle, Barlow and Mazard PLLC.

Aetna said the combined company is projected to have over 33 million medical members, based on memberships as of March 31. Operating revenue is expected to be about $115 billion this year, with approximately 56 per cent from US government sponsored programmes including Medicare and Medicaid.

Last week, the US Supreme Court upheld subsidies for individuals under President Barack Obama’s signature health care law, keeping a large chunk of patients intact under the Medicare and Medicaid programmes.

Insurers have said subsidies are key to bringing in new customers and the ruling has removed uncertainty for insurers looking for acquisitions. It could also spur more deal-making in the health insurance sector, which has already seen a blitz of merger activity this year.