Uncertainties over Humana in merger frenzy

Aetna's acquisition of Humana appears to be part of a merger frenzy as the five biggest U.S. health insurers look to get bigger.

But any acquisition or merger of this proportion must overcome potential hurdles. Though the Humana and Aetna boards of directors have agreed to the deal, the shareholders and federal government must still sign off on it. And there is the prospect of even more merger frenzy that could influence or even change the Aetna-Humana proposal.

The $37 billion cash and stock transaction is poised to be the biggest ever in the health-insurance industry, according to data compiled by Bloomberg News.

Still, it may soon be surpassed. Cigna Corp. last month rejected a $47 billion bid from Anthem Inc., saying the offer wasn't in the best interests of shareholders and that Anthem executives weren't fit to lead a merged insurance giant. The combined company would be the biggest in the U.S. by customers, topping UnitedHealth. Minnetonka, Minn.-based UnitedHealth had considered whether to pursue deals with Cigna or Aetna, the Wall Street Journal reported last month.

Centene Corp. on Thursday agreed to buy Health Net Inc. for about $6.3 billion in a deal that creates the biggest private administrator of Medicaid, the federally funded health program for the poor. Obamacare, formally known as the Patient Protection and Affordable Care Act, helped expand the Medicaid program to more people.

Here are other combinations that may be in the works:

•Anthem Inc. may try again for Cigna Corp.

•UnitedHealth Group Inc. — the biggest of the U.S. health insurers — might try to grab Aetna. Before Aetna announced the Humana purchase, Barclays Plc analyst Joshua Raskin said a UnitedHealth-Aetna combo makes the most sense because of cost savings and the scale it would produce.

•Anthem had weighed a bid for Humana, according to a person familiar with the matter, and could try to outbid Aetna.

•Cigna may try to play the wolf rather than the sheep. Bloomberg reported on June 25 that the company had made an offer for Humana, but that Humana's board was said to prefer Aetna's bid.

•UnitedHealth could jump in with a competing offer for Health Net, said Ana Gupte, an analyst at Leerink Partners LLC.

•Further deals among smaller companies may occur. Centene and Health Net's combination suggests that firms that aren't among the five biggest will be taken in by the Obamacare-fueled merger frenzy.

Together, Aetna and Humana would have more than 33 million health-insurance customers and about $115 billion in annual revenue, creating the No. 2 U.S. health insurer by sales, after UnitedHealth Group Inc. Aetna specializes in commercial coverage, while Humana is a leader in Medicare.

Humana shareholders will receive $125 in cash and 0.8375 of an Aetna share for each of Humana's. The companies expect the deal to close in the second half of 2016. Aetna Chief Executive Officer Mark Bertolini will be chairman and CEO of the combined company, which will remain in Hartford, Connecticut. It's too early to say what roles other executives will take, Tom Noland, a Humana spokesman, told Bloomberg by phone.

Medicare membership is projected to rise to 68.4 million in 2023, up 26 percent from this year, according to the Centers for Medicare & Medicaid Services. About a third of those people are now enrolled in Medicare Advantage, and Goldsmith said that half of the elderly may eventually buy private plans.

Aetna said that while it will maintain its Hartford headquarters, government programs including Medicare, Medicaid and coverage sold to military members will be based in Louisville.

The companies said cost savings from the transaction will be $1.25 billion a year by 2018, while cumulative integration costs will be about $1 billion through 2019. By 2018, the transaction should increase operating earnings by a low double- digit percentage, excluding costs tied to the transaction and integration, the companies said in a presentation.

The breakup fee is $1 billion if the deal fails for regulatory reasons, Aetna spokeswoman Cynthia Michener said.

The transaction comes on the heels of major deals for both Humana and Aetna. Aetna completed the $8.7 billion acquisition of Coventry Health Care Inc. in May 2013, adding 3.7 million medical members. Humana earlier this year divested its occupational health business, called Concentra, in a $1 billion deal.

Citigroup Inc. and Lazard Ltd. provided financial advice to Aetna, while Davis Polk & Wardwell LLP is acting as legal adviser. Goldman Sachs Group Inc. gave financial advice to Humana and Fried, Frank, Harris, Shriver & Jacobson LLP is its legal adviser.

Material from Bloomberg News and The Courier-Journal were used in this report.