Health insurance giants Aetna (AET) and Humana (HUM) have decided to tie the knot, as Aetna agreed to purchase Humana for $34.1 billion. If approved, the deal will create a powerhouse with more than $100 billion in annual revenues, second only to UnitedHealth Group (UNH).
HUM stock was up as much as 4% in early trading Monday, while shares of Aetna, the acquirer, were off as much as 6%. But the deal also could have major ramifications for Anthem (ANTM) and Cigna (CI), two other major health insurers in advanced talks to merge.
That’s because the Aetna-Humana deal will be the first health insurance mega-merger up for review by antitrust regulators. Signing off on the creation of a third company with combined annual revenue in excess of $100 billion — which would be the result of an Anthem-Cigna marriage — would be even harder to justify after the Aetna-Humana merger.
As Aetna CEO Mark Bertolini coyly put it: “Being first in creates caution for others coming in next.”
Both ANTM stock and CI stock were off slightly today on the news. Personally, I think the proposed combination of AET and HUM kills the Anthem-Cigna deal entirely.
By No Means a Sure Thing
To be clear, the $34.1 billion Aetna-Humana deal isn’t even a sure thing itself. It includes a provision for Aetna to pay Humana $1 billion if the deal is blocked for antitrust reasons. The acquisition will be financed in part by a new issuance of AET stock, another reason AET is down on the news today.
Moreover, today’s rapidly consolidating health insurance industry is incestuous, and there’s a distinct possibility someone else could swoop in and acquire either AET or HUM despite their agreement. UNH has expressed interest in Aetna before, according to the Wall Street Journal. And Cigna had been flirting with the idea of acquiring Humana as recently as last week, according to the same report.
The possibility of the deal being undone by a buyout at the hands of another player is also reflected in the contract’s language: If either HUM or AET has to pull out due to a higher bidder, the other company will receive a $1.4 billion apology check … er … “breakup fee.”
A few weeks ago, InvestorPlace feature writer Dan Burrows suggested Cigna hold out for a higher bid from ANTM, which was offering $184 per share for the company, or about $80 per share more than Cigna stock was worth at the beginning of the year. With the Aetna-Humana deal now in ink, perhaps Cigna should’ve taken that offer after all.
To be fair, some analysts believe an Anthem-Cigna merger is even more imminent now that there are fewer options on the table. Ana Gupte of Leerink Partners thinks CI stock can fetch between $190 and $195 per share now.
I disagree. I think the antitrust concerns are now too great and that Cigna will demand an extremely high reimbursement in its contract in case the government nixes the deal.
I could be wrong; I don’t pretend to know how regulators would react to an Anthem-Cigna merger in the wake of the Aetna-Humana deal. But I know that the risks are there — one former Federal Trade Commission lawyer compared today’s merger enforcement landscape to “swimming with sharks” — and so I wouldn’t wager on it going through.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
