First big insurance buyout.
In the health insurance industry, where scale is everything, the Supreme Court’s ruling last week removing a cloud over the future of Obamacare is having the expected effect of unleashing a spate of mergers and acquisitions among insurers. The first megadeal — there will be more — was announced today.
Aetna plans to acquire Humana, a struggling smaller insurer. The combined companies will have 33 million enrollees and $115 billion of annual revenues. Aetna is paying $37 billion for Humana, making this the industry’s largest acquisition to date, but it’s a flea bite compared to the $296 billion already spent on healthcare M&A this year, and the year is only half over.
The rapid consolidation of the industry reflects that a bigger company has more pricing clout and an easier time building up doctor networks. This acquisition may also be a poison pill of sorts, as Aetna itself was considered an acquisition target by United Healthcare, the biggest insurer. A bigger Aetna will be harder to take over.
Wall Street has seen Humana as ripe for picking for some time. After several quarters of disappointing earnings, the company came under investor pressure, hired a CFO from Goldman Sachs, and began reviewing potential asset sales. Selling the company “has been anticipated since May, when it was … reported that Cigna and Aetna were interested, and multiple sources confirmed … the company was entertaining offers,” CNBC reported.
Humana shareholders will get a 23% premium from Thursday’s closing stock price. It’s common for acquiring companies to pay above market price in buyouts, and 23% is about average for such deals. Humana shareholders will get half the buyout in cash, and half in Aetna stock which they can sell if they choose, but in any case they won’t own Humana shares anymore.
Wall Street expects federal antitrust regulators to require some divestitures but ultimately approve the deal, which will make Aetna the country’s second-largest health insurer.