Tara Lachapelle New York
Anthem offered to buy smaller health insurer Cigna for about $47 billion (R571bn) in what would be the industry’s biggest takeover.
The non-binding proposal is for $184 a share, about 31 percent of which would be paid in Anthem shares and the rest in cash. That is a 29 percent premium to Cigna’s average closing price in the past 20 trading sessions. Anthem said on Saturday the total transaction value was $53.8bn, including net debt.
The merged entity would be about 24 percent owned by Cigna shareholders and would serve about 53 million members. Cigna did not comment.
“It’s a decent premium,” said Thomas Carroll, an analyst for Stifel Financial. “The question investors will have now is how this news changes all the M&A speculation that’s out there swirling about”.
Consolidation wave
Health insurance companies are on the verge of a consolidation wave much like the pharmaceutical industry has been experiencing. Companies like Anthem are searching for ways to cut costs and keep expanding profits amid a surge in enrolment from the Patient Protection and Affordable Care Act, also known as Obamacare.
Aetna made a takeover proposal to Humana in the past few days, the Wall Street Journal reported on Saturday, without giving its source. Humana had a market value of $30.3bn on Friday, compared with Aetna’s $43.3bn.
Anthem, valued at $43.5bn, was considering a takeover of Cigna or Humana, a person familiar with the matter said earlier this month. Stifel’s Carroll said he was surprised it chose Cigna because Humana’s Medicare expertise would complement Anthem, which focuses more on Medicaid. Medicare is for the elderly and disabled, while Medicaid covers the poor.
Analysts said if Anthem targeted Cigna, Aetna might pursue Humana. It is also possible industry leader UnitedHealth would acquire Aetna, leaving Humana without a suitor, said Carroll. WellCare Health Plans, a smaller provider with a market value of $3.9bn, was also, analysts believed, a takeover candidate.
Anthem said on Saturday that combining with Cigna would boost adjusted earnings by more than 10 percent in the first year. Together, they would generate more than $115bn in annual revenue.
A $53.8bn enterprise value for Cigna would be about 14 times what the company earned before interest, taxes, depreciation and amortisation in the past 12 months. That is more than double Anthem’s own Ebitda multiple.
“This combination is the best strategy for both organisations to maximise potential and lead the transformation of the health-care industry,” said Anthem head Joseph Swedish.
Four proposals
Anthem said it had held discussions with Cigna about a merger since August 2014 and had made four written proposals this month, starting with an offer of $174 a share on June 3. It made its latest bid public after the talks hit a snag over who would run the company and who serve on the board. Anthem said it offered to name Cigna’s chief executive, David Cordani, as president and chief operating officer of the combined entity, as well as co-chairman of the integration team. But Cigna insisted on Cordani remaining head, said Anthem.
Anthem spoke of “unreasonable governance demands” and urged Cigna to “return to negotiations to reach a mutually agreed-upon transaction”.
Anthem was “holding Cigna’s board’s feet to the fire to make a decision,” Stifel’s Carroll said. “If this deal does ultimately happen, it will certainly put pressure on some of the other players.”
Of the top executives at the three biggest potential targets, Aetna chief executive Mark Bertolini has the most to gain from an acquisition.
He could receive $131.3 million should he lose his job in a takeover, according to Bloomberg. Cigna’s Cordani would get $58.7m, while Humana head Bruce Broussard’s so-called golden parachute is valued at $26.1m.
The entire health-care industry had been on a takeover spree, from medical-device companies and drug makers to hospitals, said Jason McGorman, an analyst for Bloomberg Intelligence.
Also a record $330bn in mergers and acquisitions were announced in the industry last year, and 2015 should top that. – Bloomberg