Aetna share price down, to buy Humana in largest insurance deal

Health insurer Aetna Inc said it has agreed to acquire Humana Inc, the second-largest provider of private Medicare insurance, for $37 billion in cash and stock as it seeks to expand its health-care coverage.

The combination will bring Aetna close to Anthem Incs No.2 insurer spot by membership, and would nearly triple its Medicare Advantage business. The deal values Humana at $230 per share, a premium of 29% over its May 28th price, the last close unaffected by following reports that the company was considering a sale.

Aetna said it would pay Humana shareholders $125 in cash and 0.8375 Aetna shares per Humana share held. Upon completion of the deal, expected in the second half of 2016, Aetna shareholders would own 74% of the combined entity, while Humana shareholders would control the rest. Aetna Chief Executive Mark Bertolini will be chairman and CEO of the combined company.

Aetna said it would fund the cash portion of the deal with existing cash, combined with $16 billion of new-term loans, debt and commercial paper. This would be the largest transaction in the health-insurance industry, creating the second-largest managed care company in the US.

However, it may soon be surpassed. Cigna Corp rejected last month a $47-billion bid from Anthem Inc, arguing the offer wasnt in the best interest of shareholders, while the Wall Street Journal also reported that UnitedHealth Group Inc, the biggest insurer, has considered whether to pursue deals with Cigna or Aetna.

Some of the consolidation efforts in the industry have been fueled by the Patient Protection and Affordable Care Act, also known as Obamacare, which provides subsidies to help people afford coverage, creating millions of new customers. Analysts have said that M&A activity in the healthcare sector had been waiting for the outcome of a Supreme Court ruling, which last week upheld these subsidies for more than 6 million people, giving insurers more certainty and clearing the way for further consolidation in the industry.

The acquisition “brings together Humanas growing Medicare Advantage business with Aetnas diversified portfolio and commercial capabilities to create a company serving the most seniors in the Medicare Advantage programme,” the two companies said.

The transaction will face antitrust scrutiny as regulators measure its effect on competition for each line of insurance, but also city-by-city to see if the combined company would have a monopoly in any metropolitan area. Analysts largely expect the combination to secure approval, although with possible divestiture requirements.

Aetna said the combined company would have over 33 million medical members, with operating revenue projected at about $115 billion this year, of which 56% from government-sponsored programs including Medicare and Medicaid. Synergies are expected to be $1.25 billion annually in 2018, Aetna CFO Shawn Guertin said.

Humana Inc fell 2.9% on Thursday to $187.50 per share in New York. US financial markets are closed today for the Independence Day holiday.

Aetna Inc slid 2.6% yesterday to close at $125.51 per share, trimming its year-on-year gain to 51.36% and valuing the company at $45.01 billion. According to CNN Money, the 18 analysts offering 12-month price forecasts for Aetna have a median target of $127.50, with a high estimate of $159.00 and a low estimate of $86.00. The median estimate represents a 1.59% increase from the last price of $125.51.