Aetna to buy Humana for $37 billion in largest insurance deal

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(Reuters) — Health insurer Aetna Inc. said it would buy smaller rival Humana Inc. for about $37 billion in cash and stock, in the largest-ever deal in the insurance industry.

The combination will push Aetna close to Anthem Inc.'s No.2 insurer spot by membership, and would nearly triple Aetna's Medicare Advantage business.

The deal will face antitrust scrutiny, but if it goes through it would dwarf the previous largest insurance deal announced just this week, where Swiss property/casualty giant Ace Ltd. announced it was buying Chubb Corp. for $28 billion. It would also dwarf Anthem Inc.'s purchase of WellPoint Inc. in 2004 for $16.6 billion.

Analysts have said that M&A activity in the health care sector had been waiting for the outcome of last week's Affordable Care Act ruling, which upheld key subsidies that underpin the reform law and thus gave more certainty to health care insurers.

The bigger the insurer, the more power it has negotiating prices and improving its doctor networks.

Anthem has offered to buy Cigna Corp. to create the largest insurer in the country, toppling UnitedHealth Group Inc.

Media reports have also said UnitedHealth could be eyeing Cigna and Aetna. On Thursday, Centene Corp. said it would buy smaller rival Health Net Inc. for $6.3 billion.

Antitrust issues

Antitrust authorities, who were aggressive in their review of the failed deal between Comcast and Time Warner Cable, are expected to scrutinize how the combination of insurers will affect competition for each line of insurance: Medicare, Medicaid for the poor, individual insurance, commercial insurance for small and large businesses and the large employer business.

Aetna and Humana are in nine of the same states in Medicare Advantage. Combined, they would have market share of 88% in Kansas, 80% in West Virginia, 58% in Iowa and 51% in Missouri.

Wall Street analysts and some antitrust experts have said they expect the combination will be approved, although regulators may ask for some divestitures.

Others have said it is unclear that this group of regulators will stick to the usual review playbook for such a large deal and may add other restrictions.

The U.S. Justice Department, which reviews insurance mergers, will scrutinize deals city by city to see if the combination would have a monopoly in any metropolitan area, said Andre Barlow, a veteran of the department who is now at Washington law firm Doyle, Barlow & Mazard P.L.L.C.

Aetna said the combined company is projected to have over 33 million medical members, based on memberships as of March 31. Operating revenue is expected to be about $115 billion this year, with approximately 56% from government-sponsored programs including Medicare and Medicaid.

Last week, the U.S. Supreme Court upheld subsidies for individuals under President Barack Obama's signature health care law, keeping a large chunk of patients intact under the Medicare and Medicaid programs.

Insurers have said subsidies are key to bringing in new customers and the ruling has removed uncertainty for insurers looking for acquisitions. It could also spur more dealmaking in the health insurance sector, which has already seen a blitz of merger activity this year.

Cash and shares

Hartford, Connecticut-based Aetna said it would pay Humana shareholders $125 in cash and 0.8375 Aetna shares for each share held. The offer of about $230 per share is a 23% premium to Humana's closing price on Thursday.

Following the deal, Aetna shareholders would own about 74% of the combined company with Humana shareholders owning the rest. Aetna Chief Executive Mark Bertolini will serve as chairman and CEO of the combined company.

The deal is expected to close in the second half of 2016 and add to operating earnings per share from 2017.

Humana's sale has been anticipated since May, when it was first reported that Cigna and Aetna were interested, and multiple sources confirmed to Reuters that the company was entertaining offers.

Humana, based in Louisville, Kentucky, has been under pressure for more than a year from investors, who include activist fund Glenview Capital Management, to produce higher returns.

Last year Humana hired a chief financial officer from investment bank Goldman Sachs and went through a strategic review that included asset sale. But it missed several quarters of earnings targets and struggled with profits in its individual business, disappointing Wall Street.

Aetna said it has received commitments from Citi and UBS Investment Bank to finance the deal.

Citi and Lazard are financial advisers for Aetna, and Davis Polk & Wardwell L.L.P. is its legal adviser. Goldman Sachs is the financial adviser to Humana, while Fried, Frank, Harris, Shriver & Jacobson L.L.P. is its legal adviser.