For anyone waiting on the long-discussed union of health insurers Cigna (CI) and Anthem (ANTM), today is the day.
Although the two companies have been back and forth with one another for weeks, a deal between Cigna and Anthem has been announced. Prior to this, the Wall Street Journal reported on Wednesday that a deal was imminent, and the buzz surrounding Cigna stock and Anthem stock grew even louder on Thursday, underscoring the WSJ’s assessment.
And yet, those who are citing antitrust concerns as reason to doubt such a deal — and there are doubters, as evidenced by the decline in both CI and ANTM shares this morning — may have a cogent argument.
Since we’re in the midst of an already uncompetitive health-insurer market, a deal between ANTM and CI would make that market dangerously lopsided, setting up a temptation trap that even the most honorable of CEOs would eventually fall into.
Recognizing the inherent risks such a deal would pose, a hawkish Department of Justice isn’t likely to accommodate the acquisition as Anthem’s CEO would hope.
What a Post-Deal Anthem Would Look Like
As stunning as it may sound, even the pairing of the nation’s second-biggest health insurer, Anthem, with the fifth-biggest, Cigna, would still leave ANTM playing second fiddle to industry giant UnitedHealth Group (UNH) in terms of revenue as well as market cap — a detail Anthem’s attorney’s would certainly point if pressed by U.S. Department of Justice attorneys.
Combined, assuming nothing changes along the way, Cigna and Anthem would produce $109 billion in annual revenue. For perspective, UnitedHealth Group drove $130.4 billion in revenue last year and converted $5.6 billion of it into net earnings. Cigna and Anthem collectively generated a profit of $4.7 billion.
Anthem CEO Joseph Swedish, however, has ambitious plans for the bottom line. He’s aiming to save $2 billion in overlapping costs by combining the two companies. Which, if successful, works out to an eventually boost of the paired companies’ net income by more than 40%.
While Swedish’s goal is at the upper end of “lofty,” it’s not out of line with some of Wall Street’s less-biased observers. Leerink Partners analyst Ana Gupte noted, “This deal would be highly accretive at 25+% in 2018E Year 2 after close with a pro forma EPS estimated at $17-18 per share.”
But, and there’s always a “but” …
What CI (and ANTM) Owners Need to Know
While the prospects of big-time savings are compelling to Anthem shareholders as well as owners of Cigna stock (who will likely be receiving a combination of cash and Anthem stock as part of the deal), it’s too soon to assume a deal will get done.
The Department of Justice may try to block the deal.
Weighing in against the acquisition is the pending merger of the nation’s third and fourth-biggest insurers, Aetna (AET) and Humana (HUM), respectively. AET announced earlier this month it would be acquiring HUM to the tune of $34 billion.
If Aetna and Humana team up — and it appears they will — and Anthem and Cigna tie the knot as well, five of the nation’s largest health insurers will become the three biggest, and even five doesn’t appear to be enough.
In December of last year, the U.S. Government Accountability Office published the results of a multi-year fact-finding study and found that in 37 of the nation’s states, the three largest health insurers controlled 80% of the market. In 10 states, one insurer controlled more than half the market. These numbers, which are already alarming, could reach nuclear levels if either of the aforementioned acquisitions are permitted.
Investors should also bear in mind that the DOJ’s Antitrust Division has become noticeably more skeptical of mega-deals as it has moved from a formulaic approach toward a commonsense one. Remember, the Department of Justice effectively quelled the merger efforts of Comcast Corporation (CMCSA) and Time Warner Cable (TWC) in April even though both parties made valid arguments that their geographic overlap was minimal. And in 2011, the DOJ upended the attempted union of AT&T (T) and T-Mobile (TMUS) before it got traction.
Point being, the Department of Justice has been hawkish in recent years, and is likely to view either of these healthcare-insurer deals in the same alarming light.
Bottom Line for Cigna Stock
Regardless of the eventual outcome, the mere likelihood of an acquisition offer could be more than enough to catapult Cigna stock near a suggested buyout price of $188 per share. If that happens, the smart-money should bolt for the exit, taking what you can get while you can get it.
The explanation: The best-case scenario of an acquisition is Cigna shares edging imperceptibly higher to the date of the cash and Anthem stock swap sometime next year. The worst-case scenario is the Department of Justice canning the deal outright after an offer is made — a decision that would most assuredly punish the value of Cigna stock.
In other words, from a risk/reward perspective, the war will be won if and when the offer becomes official. Barring that, there’s no need to keep fighting battles.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
