First, the Supreme Court announces that the Affordable Care Act (aka, ACA or Obamacare) is Constitutional.
Now, the question is, what happens with the next bit healthcare insurance stock, Cigna (CI)?
But before we get to CI, let’s set the stage here. Now that ACA is the law of the land regarding healthcare, all the insurers are scrambling to position themselves in the best possible way.
And in this instance, it’s buying up as much real estate (clients) as you can. While smaller insurers that have covered Medicaid patients are winning big in that part of the market, the bigger and growing share is Medicare.
Remember, there are 76.5 million baby boomers that are retired or will be retiring — and qualifying for Medicare — over the next two decades. This is a major demographic shift in how the healthcare system operates and the big insurers believe that volume is what will keep them on top.
That’s why we saw AET swallow HUM in late June.
Until that deal was inked, Cigna was actually trying to court Humana. But it wasn’t to be.
Now you have Cigna, UnitedHealth Group (UNH) and Anthem (ANTM). UNH is the biggest healthcare insurance provider now, and the AET/HUM merger was made to stay competitive. Now, it looks like Anthem is going to make another attempt at Cigna.
ANTM has tried a couple of times to snare CI, but Cigna had its eye on another. In its offer made last month, Anthem offered a 35% premium on where CI stock was trading.
Cigna’s options are somewhat limited here, especially if Anthem comes in with a offer equal to or greater than the one the laid out previously.
If CI doesn’t want the deal, it is going to have to explain to shareholders how finding a small merger partner or two and risking it against consolidating major competitors is somehow better than joining with a major industry player and getting paid a 35% premium to do it.
It looks like the Big Five will soon become the Big Three, since just this week Cigna and Anthem were back at the table talking terms.
The thing is, CI stock has been selling off this week as the news accelerates. Perhaps the thinking is that Anthem doesn’t need Cigna as much as Cigna needs Anthem.
The merger is close to a merger of equals, and still wouldn’t come close to the size of UnitedHealth. But having been spurned so many times, it’s likely that Anthem has other alternatives if CI balks again.
But at this point, Cigna’s top alternative is off the table. That’s a tough negotiating position to be in. For example, what happens if ANTM plays hardball and now lowers its offer? Can CI afford to hold out for a better deal?
At the end of the day however, this is all inside pool. The worst-case scenario is someone buys Cigna at a premium, just not 35%. And then management is sent packing as a reward. As a CI stock holder, that’s not something to lose sleep over.
Given Cigna’s size and market strength, it is a prize worth having, and the only player that can step in and beat ANTM to the prize is UNH, which isn’t likely.
Even if a deal doesn’t happen, CI is in great position to expand its presence in the in sector and can easily buy smaller firms gradually to build its base. And that may be a smarter long-term strategy. But shareholders, talking heads and dealmakers like the drama of big mergers, so that will be the story for now.
But for the future, CI is a good long-term deal now in a very exciting space.
Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip Growth, Emerging Growth, Ultimate Growth, Family Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.
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