Health insurer Aetna Inc has announced plans to acquire smaller rival Humana Inc for approximately $37 billion in cash and stock. If the deal sneaks through anti-trust tests, it would become the largest insurance acquisition in history. The deal would also allow Aetna to close in on Anthem’s number two spot while tripling Aetna’s Medicare Advantage business.
If government officials allow the merger to take place, it would dwarf this week’s deal between Swiss property and casualty giant ACE Ltd and Chubb Corp, a deal worth $28 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. With the Supreme Court ruling in favor of Obamacare, there is now more certainty in the healthcare industry.
Anthem has also recently offered to buy Cigna Corp. If that deal happens it would become the largest insurer in the country, toppling UnitedHealth Group Inc.
In another report, UnitedHealth is said to be eyeing Cigna and Aetna. While Centene Corp has made a $6.3 billion offer to acquire Health Net Inc.
Are There Antitrust Issues?
Antitrust experts for the U.S. government will closely scrutinize how this acquisition will affect medical premiums for Medicare, Medicaid for the poor, individual insurance, commercial insurance for small and large businesses and the large employer business.
Currently Aetna and Humana are in nine of the same states in Medicare Advantage. If acquired they would own 88 percent of the market share in Kansas, 80 percent in West Virginia, 58 percent in Iowa and 51 percent in Missouri.
Wall Street analysts believe the deal will be approved, but not before some divestitures are included in the acquisition. Some analysts believe other restrictions will be added into the deal to ensure a fair playing field for everyone involved.
The Justice Department, which reviews insurance mergers, will examine both companies on a city-by-city basis to ensure that an urbanized monopoly is not created by the merge.
When combined Aetna would control the fate of 33 million medical members. The company would feature an annual operating revenue of $115 billion, 56% which would come from government-sponsored programs such as Medicare and Medicaid.
What The Deal Entails For Shareholders
Aetna will pay Humana shareholders $125 in cash and 0.8375 Aetna shares for each share held. With a rate of $230 per share that’s a 23 percent premium to Humana’s closing price on Thursday. Aetna shareholders would own approximately 74 percent of the company while Humana shareholders would own the rest.
The company would be led by Aetna CEO Mark Bertolini, who will also serve as chairman.
The deal will close in the second half of 2016 while adding to operating earnings per share in 2017.
In the meantime, Humana has struggled to hit revenue goals over the last several years, and recently missed earnings targets.
Aetna has received commitments from Citi and UBS Investment Bank to finance the deal.