By Liz Hoffman And Anna Wilde Mathews
After weeks of banking on a takeover, Humana Inc.'s shareholders
reacted coolly to news of the insurer's $34.1 billion announced
sale to Aetna Inc., amid concerns over the deal's antitrust
prospects, the possibility of an interloper and weakness in
Humana's own business.
Shares of Humana closed Monday 15.4% below the value of Aetna's
cash-and-stock offer, a yawning gap that suggests investors worry
the deal may face challenges. Some of the same concerns socked
Aetna's stock, which fell 6.4%.
Sale announcements typically trigger a two-way investor
migration. Mutual funds and other long-term holders, eager to lock
down their profits, often sell. Specialists known as merger
arbitragers pour in, helping to keep the share price trading close
to the deal value.
Those concerns are contributing to the spread between the deal's
offer price and where Humana is trading. At Monday's close, Aetna
shares had fallen 6.3% to $117.56. Based on the deal's terms, that
price would value Humana at about $223.46. Instead, Humana shares
closed at $189.26, up only slightly and still more than $30 below
the offer price.
Speaking of risks that kept hedge funds away Monday, one
arbitrager said: "Everything goes right and maybe you make a ton of
money. One thing goes wrong, you get killed."
The largest unknown is antitrust approval, investors and
analysts said. Aetna and Humana are the third- and fourth-biggest
U.S. health insurers by revenue, and together would have about a
million more Medicare subscribers than their next-closest
competitor. Sterne Agee CRT analysts said regulators could require
Aetna to sell around 575,000 Medicare Advantage customers, equating
to $6 billion in revenue.
Time, the enemy of M&A wagers, is a factor, too. The deal
isn't expected to close until late next year, tying up investors'
money.
Threatening to muddy the regulatory picture is the mating dance
under way between Anthem Inc. and Cigna Corp., the second- and
fifth-largest insurers by revenue. The pair rekindled talks after
Cigna rejected a public, $184-a-share bid from Anthem last month, a
deal that, when paired with Aetna-Humana, would whittle the five
largest insurers to three.
Aetna and Humana hoped to gain an edge with regulators by moving
first, though Aetna Chief Executive Mark Bertolini said Monday the
Aetna-Humana combination "could be bundled together" with other
insurance mergers for antitrust review.
Aetna and Humana say their tie-up will enable them to offer more
choices and pass the savings wrung from their combination onto
customers. Mr. Bertolini said the antitrust risk is manageable--a
view echoed by several analysts Monday--and that Aetna "took a
conservative view" of potential divestitures that regulators might
seek and baked those projections into its deal price.
Concerns lurk, too, in the frenzied merger talks among the top
five insurers that preceded the holiday-weekend announcement.
UnitedHealth Group Inc., the largest health insurer by revenue, had
earlier approached Aetna about a takeover, and could still play
spoiler because Aetna's shareholders must approve the Humana
deal.
If Humana were to end up deal-less, its business forecast Monday
wasn't reassuring. It lowered its 2015 earnings guidance to $7.75 a
share, down from a range of $8.50 to $9 a share, attributing the
downgrade largely to higher than expected hospital admissions among
its Medicare members.
"If the deal falls apart, then the market really looks at Humana
and says, 'what are its earnings capabilities over the next few
years and what are the macro risks with Medicare Advantage?'"
Thomas Carroll, an analyst with Stifel Financial Corp., said in an
interview. "You would see the stock push back."
Aetna Chief Financial Officer Shawn Guertin said the company had
included an "appropriate level of conservatism around Humana's
future financial performance" in its financial projections for the
deal. Aetna is going on the road this week to press the deal's
merits, meeting with investors in New York on Tuesday and Boston
Wednesday, according to people familiar with the matter.
Write to Liz Hoffman at liz.hoffman@wsj.com and Anna Mathews at
anna.mathews@wsj.com
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