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 The combination will push Aetna close to Anthem Inc's <ANTM.N> No.2
insurer spot by membership, and would nearly triple Aetna's Medicare
Advantage business.
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 healthcare 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 healthcare 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 ISSUES
Antitrust authorities, who were aggressive in their review of the
failed deal between Comcast <CMSAO.O> and Time Warner Cable <TWC.N>,
are expected to scrutinize 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.
Aetna and Humana are in nine of the same states in Medicare
Advantage. Combined, they would have market share of 88 percent in
Kansas, 80 percent in West Virginia, 58 percent in Iowa and 51
percent in Missouri.
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.
The Justice Department, which reviews insurance mergers, will
scrutinize 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 percent from government sponsored programs
including Medicare and Medicaid.
Last week, the U.S. Supreme Court upheld subsidies for individuals
under President Barack Obama's signature healthcare law, keeping a
large chunk of patients intact under the Medicare and Medicaid
programs.
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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.
CASH AND SHARES
Hartford, Conn.-based 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 percent premium to Humana's closing
price on Thursday.
Following the deal, Aetna shareholders would own about 74 percent 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.
Humana's sale has been anticipated since May when it was first
reported that Cigna Corp <CI.N> and Aetna were interested, and
multiple sources confirmed to Reuters that the company was
entertaining offers.
Humana, based in Louisville, Kentucky, has been under pressure for
more than a year from investors, who include activist fund Glenview
Capital Management, to produce higher returns.
Last year Humana hired a CFO from investment bank Goldman Sachs and
went through a strategic review that included asset sale. But it
missed several quarters of earnings targets and struggled with
profits in its individual business, disappointing Wall Street.
Aetna said it has received commitments from Citi and UBS Investment
Bank to finance the deal.
Citi and Lazard are financial advisers for Aetna and Davis Polk &
Wardwell LLP is its legal adviser. Goldman Sachs is the financial
adviser to Humana, while Fried, Frank, Harris, Shriver & Jacobson
LLP is its legal adviser.
(Additional reporting by Rama Venkat Raman in Bengaluru; Editing by
Ken Wills, Rodney Joyce and Gopakumar Warrier)
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