These Health Insurance Mergers Aren’t Alike

Investors have taken a dim view of two big pending health insurance mergers. But the two deals are starting to diverge, which could give investors an opportunity.

More than a year ago, four of the five largest private insurers agreed to mergers, which would consolidate the industry into three giants. The euphoria, which drove share prices to new heights, was short-lived. The Justice Department sued to block the two deals—between Aetna and Humana and Anthem and Cigna.

The lawsuits argue that both mergers would reduce competition and drive health-care costs higher. That is a big obstacle, and as a result shares of both companies to be acquired trade well below the current offer price.

But one set of companies appears to be working together toward a resolution to get the deal done. The other is bickering, making it appear unlikely they can defeat the government. The happy couple is Aetna and Humana, the feuding pair is Anthem and Cigna. What is significant for investors is that the market is saying both deals have a similarly low chance of getting completed.

Anthem and Cigna have butted heads since before the deal’s announcement over issues like who would run the combined company. And nearly 15 months after the deal was first announced, Anthem and Cigna’s relationship doesn’t seem to be improving. More recently, each side has accused the other of violating the merger agreement.

A substantial breakup fee—Anthem would owe Cigna nearly $2 billion if the deal falls through, unless Cigna walks away—lowers the likelihood of either side abandoning the deal before a trial, set to begin in November. And Anthem says it still strongly believes its identified efficiencies will be achieved. But the discord itself has hurt the deal’s chances.

In fact, the Justice Department has cited the disagreements as reason to believe that Anthem and Cigna’s proposed efficiencies and cost savings resulting from the deal may not happen. There are no signs of similar problems between Aetna and Humana, which raised its full-year earnings guidance Wednesday.

While their rivals grumble about one another, Aetna and Humana have already agreed to sell Medicare Advantage assets to Molina Healthcare in every county identified as problematic in the Justice Department’s suit.
If the Anthem-Cigna transaction falls through, it could actually make the Aetna-Humana deal more likely because there would be less industry consolidation. The big five would merge into four companies, instead of three.

That backdrop makes a successful negotiation with the government more plausible, according to analysts at Elevation Securities.

It is still possible that Aetna and Humana’s proposed remedies won’t be enough to make a deal happen, but Humana’s shares trade nearly 23% below the current value of Aetna’s offer. That suggests significant upside if the regulators can be mollified and a deal goes through.

All of this should play out through early next year.

Should that scenario come to pass, Anthem and Cigna’s discord will be music to the ears of Humana shareholders.

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