Humana cuts outlook,
raising new concerns about Aetna deal
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[July 07, 2015]
By Caroline Humer
NEW YORK (Reuters) - Humana Inc, fresh from
announcing an agreement to be purchased by larger rival Aetna Inc,
prompted new investor concerns about the $33 billion deal on Monday by
lowering its 2015 financial forecasts.
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The transaction announced on Friday is already expected to face a
tough review by U.S. antitrust regulators, particularly if another
major deal among health insurers emerges.
Humana, which has posted disappointing results for several quarters
in a row, said on Monday that members of its Medicare Advantage
plans for the elderly were using hospital services at a higher rate
than the company expected.
That increase could cut into already tight profit margins, if Humana
ends up paying more for medical claims than they anticipated when
setting monthly insurance rates.
Humana CEO Bruce Broussard said on a conference call with investors
that inpatient hospital admissions have not performed in line with
what the company had forecast. That contributed to its decision to
slash expected 2015 operating profits by more than 8 percent. The
company said it had taken the higher Medicare Advantage hospital use
into account when it priced premiums for 2016.
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"If you take the 8 percent downgrade of their earnings and roll that
through, that makes what Aetna paid pretty expensive," said Joel
Emery, a portfolio manager at Tareo Capital Management in New York.
The degree to which Humana will boost Aetna's earnings in 2017 and
2018 is less than what some investors had hoped for, he said.
Aetna's offer of $125 in cash and 0.8375 Aetna shares for each
Humana share valued Humana at $230 per share. On Monday, Aetna fell
6 percent to $117, bringing down the offer price to $223 per share.
Reflecting growing doubts about the deal, Humana shares traded well
below the proposed offer price, closing at $188.96.
"Aetna shareholders have to approve the deal, and with such a large
premium, there is some outside chance that shareholders will not
approve it," said Standard & Poor's equity analyst Jeffrey Loo.
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Humana's negative comments provided a silver lining to hospital
operators, who stand to benefit if patient admissions rise and they
are reimbursed for more of their services, said Les Funtledyer,
portfolio manager at ESquared asset management. He owns shares of
HCA Holdings and Universal Health Services.
Consolidation among health insurers is also spurring investors to
seek out cheaper stocks in the healthcare sector, such as hospitals,
said Jessica Bemer, portfolio manager for Snow Capital Management in
Sewickley, Pennsylvania.
"If there are fewer insurers for healthcare investors to own, that
means they have to get their healthcare exposure elsewhere," Bemer
said.
Shares of Community Health Systems, Tenet Healthcare and HCA bucked
the overall market's decline and gained 0.7 percent, 0.5 percent and
1.8 percent on Monday. Bemer holds Community Health shares.
(Additional reporting by Susan Kelly in Chicago; Editing by
Christian Plumb)
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