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 The proposed acquisition, the health insurance industry's largest,
comes three weeks after Aetna Inc agreed to buy Humana Inc for $37
billion.
Health insurers are finding it tougher to raise prices following the
roll-out of President Barack Obama's healthcare law, while grappling
with soaring expenses of medications including cancer drugs that can
cost each patient more than $100,000 a year. Anthem said buying
Cigna would help it reduce costs and negotiate lower prices with
doctors and hospitals.
State insurance regulators and federal antitrust authorities are
expected to scrutinize how the Anthem-Cigna and Aetna-Humana deals
would affect competition for Medicare and individual and commercial
insurance.
Within a few hours of the announcement, several U.S. lawmakers and a
leading physicians group said they feared the pending acquisitions
would hurt consumers by raising prices or limiting access to
healthcare providers.
"The lack of a competitive health insurance market allows the few
remaining companies to exploit their market power, dictate premium
increases and pursue corporate policies that are contrary to patient
interests," the American Medical Association (AMA) said in a
statement.
Under the deal, which the companies expect to close in the second
half of 2016, Anthem Chief Executive Joseph Swedish would serve as
CEO and chairman. Cigna CEO David Cordani would be president and
chief operating officer.
In a joint conference call, Swedish told analysts Anthem had no
prior discussions "at all" with regulators about the deal, but was
confident about approval.
Shares of Cigna on Friday fell 5.6 percent to $145.72, far below the
$188 offered in the buyout, suggesting major Wall Street concern
over the antitrust risk.
"Strategically and financially it's very attractive, but they will
face regulatory scrutiny," said Ana Gupte, analyst with Leerink
Partners. "They also both possibly face divestitures and may have to
make concessions to consumers to make the merger go through."
The AMA said its own analysis shows 41 percent of U.S. metropolitan
areas already have a single health insurer with a commercial market
share of 50 percent or more. It believes the Anthem-Cigna merger
would be presumed anticompetitive in at least nine of the states
where Anthem operates.
"It is imperative that we closely examine changes in the healthcare
market, and what has caused these changes, to ensure that consumers
are not harmed," said Senator Mike Lee, a Republican from Utah who
is chairman of the Senate's antitrust panel.
Apparent worries about regulatory scrutiny have also hit Humana
shares, which closed at $181.76 on Friday, well below the value of
Aetna's cash-and-stock offer of $230 per share when it was announced
on July 3.
BIGGER THAN UNITEDHEALTH
Cigna has 15 million members, and about 80 percent of its business
is with self-insured companies which pay it a management fee,
according to Leerink. It also serves large and small employers,
Medicare Advantage customers and individuals.
About 61 percent of Anthem's 39 million members are served through
self-insured companies, while 15 percent have Medicaid coverage.
Large and small group policies make up about 12 percent of its
business, while Medicare Advantage accounts for 1 percent.
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The combined company would have about 53 million members, surpassing
UnitedHealth Group's 45.86 million as of June 30.
Anthem said it will pay $103.40 in cash and 0.5152 of its shares for
each Cigna share. The deal is valued at $181.12 per share based on
Anthem's Friday close of $150.86.
Anthem said on Friday the offer was valued at $188 per share based
on its stock price on May 28 before media reports surfaced that the
two companies were in talks.
The offer's equity portion is valued at $49.11 billion, according to
Reuters calculations based on 261.2 million Cigna shares outstanding
as of March 31.
Another question is whether Anthem would violate rules of the Blue
Cross and Blue Shield Association, a federation of 36 independent
insurers of which it is the biggest member.
The association collectively insures 106 million Americans. Anthem
provides coverage to the most people and operates in 14 states. No
other Blue Cross member operates in more than five states.
Blue Cross operators are not supposed to compete with one another,
but Cigna does compete against Blue Cross members in a handful of
states, which could cause controversy in the association.
"There will no doubt be debate among the board of directors," said a
person knowledgeable about Blue Cross who requested anonymity to
protect business relationships.
"We will remain Blue," Swedish said on the conference call, adding
that Anthem feels confident that even after acquiring Cigna, the
combined company will satisfy "the Blue rules."
Swedish said he would serve as CEO for only two years, and remain as
chairman afterward. Cordani could be a contender for the CEO role at
that point, but no guarantees were provided, said a source familiar
with the matter who requested anonymity because the person was
unauthorized to publicly discuss details of the transaction.
Both Anthem and Cigna would be liable to pay the other a fee
equivalent to 3.8 percent of the deal's value if either walks away
from the planned merger.
Anthem's lead financial adviser is UBS Investment Bank. Credit
Suisse also served as financial adviser, and White & Case LLP as
legal adviser.
Morgan Stanley is Cigna's financial adviser and Cravath, Swaine &
Moore LLP its legal adviser.
(Additional reporting by Caroline Humer and Kylie Gumpert in New
York and Diane Bartz in Washington)
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