By Anna Wilde Mathews, Liz Hoffman and Dana Mattioli
In the game of merger musical chairs the five biggest health
insurers have been playing lately, Aetna Inc. and Humana Inc.
hustled to grab the first seats.
The two insurers disclosed their $34.1 billion tie-up after 2
a.m. EDT Friday, as the holiday weekend was beginning and after
reports that rivals Anthem Inc. and Cigna Corp. had rekindled
talks.
If Anthem and Cigna also strike a deal, three big companies,
each with annual revenue of more than $100 billion, would sit atop
the industry, with the third being UnitedHealth Group Inc.,
currently the biggest by revenue and market capitalization.
The frenzied talks, sparked earlier this year by an overture to
Humana, reflect managed-care companies' desire to diversify and cut
costs in the wake of the federal Affordable Care Act and other
changes in the health-care industry.
In an interview Friday morning, Aetna Chief Executive Mark
Bertolini said Aetna and Humana hoped that being first among the
biggest insurers to tie the knot might give them an edge in a
review by antitrust regulators. They are the third- and
fourth-largest U.S. health insurers, respectively, by revenue;
combined, they would have about a million more members in Medicare
Advantage, the private-insurance version of the federal program for
seniors and the disabled, than their next-closest competitor,
UnitedHealth.
"Being first in creates caution for others coming in next," said
Mr. Bertolini.
Antitrust regulators have signaled they plan to look at any
combinations among the biggest health insurers closely. The Wall
Street Journal reported last month that its own analysis found that
an Aetna-Humana merger would increase by about 180 the number of
U.S. counties where at least 75% of Medicare Advantage customers
are in the hands of a single insurer.
In eight states, an Aetna-Humana tie-up would remove a
competitor from the exchanges where individuals can buy coverage
under the Affordable Care Act, though insurers may not offer plans
in every region of a state.
If the deal were blocked on antitrust grounds, Aetna would owe
Humana a $1 billion fee, according to people familiar with the
matter. At 2.7% of the deal's enterprise value, which includes
assumed debt, it is relatively small as such fees go, though its
inclusion suggests the companies foresee some risk that antitrust
regulators might seek more concessions than Aetna is willing to
give.
Goldman Sachs Group Inc. health-insurance analysts, looking at
potential market-concentration issues, estimated that around 13% of
the combined Aetna-Humana's Medicare Advantage enrollment could be
at risk of divestiture on antitrust grounds.
Mr. Bertolini and Humana Chief Executive Bruce Broussard both
said they are confident the transaction will be approved, citing
complementary, rather than overlapping strengths--Aetna's in
commercial coverage, primarily sold to employers, and Humana's in
Medicare.
Antitrust reviews are "never totally predictable, but we believe
it's very manageable," Mr. Bertolini said.
Both CEOs said their combination would result in lower costs for
consumers.
Multiplayer dynamics also lurked behind Aetna and Humana's deal
talks. Cigna's dual discussions with Anthem and Humana raised
questions on the Humana side about Cigna's commitment to a
purchase: Did it really want Humana, or did it want negotiating
capital with Anthem? Humana worried Cigna was using it in an effort
to play hard-to-get with Anthem, said one person familiar with the
Louisville, Ky., insurer's thinking.
Cigna, which has resumed talks with Anthem, expressed interest
in Humana as late as Thursday evening, the person said.
Humana urged Cigna to make a cash-heavy offer, which Cigna
resisted, people familiar with the matter said. Humana worried that
Cigna shareholders--whose approval would be needed for any takeover
bid funded heavily by new stock--might not approve a Humana buyout
knowing the Anthem offer was there for the taking.
A cash bid wouldn't require Cigna shareholders' approval, so its
board could move ahead despite the Anthem offer on the table.
Aetna's offer for Humana involves a big issuance of new stock,
meaning Aetna's own shareholders must approve it. But that
structure was more acceptable to Humana, one person said, because
even though the Journal has reported that UnitedHealth has
approached Hartford-based Aetna about a takeover, no public offer
is on the table for shareholders to consider.
Aetna and Humana had been near an agreement Tuesday, said people
familiar with their talks, but negotiations around the breakup fee,
payable in case the announced deal fell apart, raised tensions,
some of the people said.
The two sides eventually agreed on a breakup fee of 3.75% of the
deal's enterprise value, currently about $1.4 billion, payable to
either company if the agreement were scuttled by a higher bid for
the other, people familiar with the matter said.
Such breakup fees are commonly promised to would-be buyers like
Aetna to compensate for the sting of a rival bidder stealing their
prize. But it is unusual to see such a fee apply to both sides,
which suggests Humana was protecting itself in case UnitedHealth
made a play for Aetna.
The structure of the Aetna-Humana deal leaves time for
UnitedHealth to interlope, because the deal requires Securities and
Exchange Commission review and shareholder approval, efforts that
can take months.
Write to Anna Wilde Mathews at anna.mathews@wsj.com, Liz Hoffman
at liz.hoffman@wsj.com and Dana Mattioli at
dana.mattioli@wsj.com
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