By Dana Mattioli, Anna Wilde Mathews
Anthem Inc. agreed to buy Cigna Corp. for $48 billion, capping
months of merger frenzy among top U.S. health insurers that could
result in a dramatic reshaping of the industry.
The deal, combining the second- and fifth-largest health
insurers by revenue, would create a company with a huge footprint
in commercial insurance, the type of coverage provided to employers
and consumers.
The merged company is projected to have around $115 billion in
annual revenue and cover about 53.2 million people. The impending
deal and its price was first reported by The Wall Street Journal
earlier this week.
The tie-up of Anthem and Cigna follows by about three weeks
Aetna Inc.'s agreement to buy Humana Inc. for $34 billion and
further accelerates the rapid-fire reconfiguration of the U.S.
health-insurance industry's top ranks, which if the deals close
would collapse from five major companies to a big three.
The biggest companies are seeking more cost efficiency and scale
as the health-care landscape changes because of the Affordable Care
Act and other factors. Of the current major health insurers, only
UnitedHealth Group Inc., the largest by revenue, is sitting out the
merger wave, at least so far.
Under the deal's terms, Indianapolis-based Anthem agreed to pay
$188 a share for Cigna, of Bloomfield, Conn., based on Anthem's
closing price on May 28. That was the day before the Journal
reported that Humana was for sale, a signal to investors that a
long-expected consolidation wave in the industry had begun. Using
Thursday's closing share price for Anthem, the deal would be valued
at $183.36 a share. Cigna shareholders would receive $103.40 in
cash and 0.5152 Anthem shares for each share held.
The combination requires approval from federal and state
regulators, and legal experts have said antitrust officials are
likely to tak e a close look at the huge tandem health-insurance
deals. Anthem and Cigna said Friday they believe their deal can
pass muster with regulators, and that the combination will benefit
consumers by improving affordability and offering a broad range of
products and services. They said they are aiming to close the deal
in the second half of 2016.
"We have very complementary strengths," said Joseph Swedish,
Anthem's chief executive, in an interview. Cigna's chief executive,
David Cordani, said the companies' strongest markets are generally
not in the same places, and "the geographic overlap is not as
redundant as people might think."
In a sign that investors have doubts that the deal--and the
parallel tie-up between Aetna and Humana--will be completed, Cigna
shares were trading at a 19% discount to the current value of the
Anthem offer late Friday morning. Humana, meanwhile, was trading at
a 16% discount to the Aetna offer. In late-morning trading, Cigna
shares fell 6.4% to $144.45, while Anthem dropped 2.4% to
$151.45.
Anthem estimates that the deal will increase its per-share
earnings by nearly 10% in the first year after closing, with
accretion more than doubling by the second year. Anthem also said
the Cigna deal could generate nearly $2 billion in annual
synergies, which generally refer to cost savings from eliminating
overlap.
Anthem shareholders would own 67% of the combined company, while
Cigna shareholders would hold 33%. Based on closing prices
Thursday, Cigna had a market value of about $39.7 billion, while
Anthem was at $41.1 billion. The companies have each agreed to pay
the other a termination fee that equates to $1.8 billion, should
the deal fall apart under various circumstances, according to an
Anthem spokeswoman.
The agreement between Anthem and Cigna caps off a monthslong,
sometimes contentious back-and-forth between the companies, with
Anthem at one point going public with its offer.
The two health insurers began holding talks about a combination
last summer, but the talks broke down over issues such as who would
run a combined company. A point of contention was the role Mr.
Cordani would play, including if and when he would run it. In June,
Cigna rejected a $47.5 billion offer from Anthem, valued at $184 a
share, calling it "inadequate and not in the best interests of
Cigna's shareholders."
Friday, the companies said Anthem's Mr. Swedish would be CEO and
chairman of the combined company, while Mr. Cordani will become
president and operations chief. The two CEOs played up their
expected collaboration, detailing the split in their duties and
trading compliments. The companies' website dedicated to the deal
features a photo of them amicably shaking hands. Two years after
the deal closes, Mr. Swedish is expected to relinquish the CEO
title. At that time, he said in an interview, Anthem's board will
have the freedom to decide the company's chief executive --
implying there is no firm commitment in place that Mr. Cordani will
assume the role at that time.
Anthem's board will be expanded to 14 members, the companies
said. Mr. Cordani and four independent members of Cigna's board
will join Anthem's nine directors.
Mr. Cordani said Cigna, which had raised concerns about
regulatory and other issues potentially hindering a deal, had come
to believe the challenges were "wholly manageable."
Anthem, which is a Blue Cross and Blue Shield plan provider in
14 states, has a commanding presence particularly in individual and
small-employer plans. But it is also a major player in serving
large, multistate employers, which it does in partnership with
other Blue-plan companies around the country. Cigna, too, is known
for its focus on administering coverage for large employers, as
well as a burgeoning overseas presence.
Another possible challenge: As a licensee of the Blue Cross Blue
Shield Association, Anthem must adhere to certain rules to use the
Blue brand. According to Anthem's annual report filed with the
Securities and Exchange Commission, the requirements include that
two-thirds of a licensee's national net revenue from health plans
and related services must stem from Blue-branded business.
Friday, Mr. Swedish said he wanted to emphasize that "we are a
Blue organization." He said the Blue requirements wouldn't preclude
the Cigna deal from closing, and he expected a collaborative
process with the other Blue-plan companies. "I'm optimistic we will
meet the test and be in full compliance with the rules," he said in
the interview.
An Anthem spokeswoman said the company has many possible ways it
could adhere to the Blue rules.
Earlier, Anthem had said that in addition to transitioning
Cigna's business in locations where it holds the Blue rights, it
could work to plug Cigna's national-employer clients that are based
outside its states into the network of Blue plans, which cooperate
using a system known as BlueCard.
The Cigna deal, together with the Aetna-Humana announcement,
will present federal and state regulators with a particularly
complex situation, and experts say they expect the two proposed
combinations, likely along with a third, smaller deal announced
earlier this month, to be reviewed together.
Analysts at Goldman Sachs Group Inc. looked at the coverage
market for big, multistate employers and concluded that antitrust
regulators might potentially consider it already on the borderline
of concentrated, even before a merger of Cigna and Anthem. But the
analysts saw little or no risk of potential divestiture for an
Anthem-Cigna combination in the Medicare Advantage, individual or
small-group business.
UBS Group AG was Anthem's lead financial adviser. Credit Suisse
Group AG also served as a financial adviser to Anthem. Its legal
adviser is White & Case LLP. Cigna was advised by Morgan
Stanley and Cravath, Swaine & Moore LLP.
Separately, Cigna on Friday raised its profit outlook for the
year after reporting strong preliminary results for its second
quarter, citing customer growth and medical-cost management.
For the year, Cigna said it is now expecting per-share income
from operations of $8.30 a share to $8.60 a share, up from its
already-raised forecast of $8.15 to $8.50 a share.
For the second quarter ended in June, Cigna said it expects its
profit to be at least $574 million, or $2.21 a share, up from $573
million, or $2.12 a share, a year earlier. Excluding a per-share
redemption charge of 25 cents, earnings would easily top the $2.25
a share in earnings analysts polled by Thomson Reuters had
forecast.
Revenue is expected to grow 9% to $9.5 billion, while analysts
had forecast $9.53 billion in revenue.
Anthem, meanwhile, also raised its 2015 per-share earnings
estimate to more than $10, up from $9.90. For the second quarter,
Anthem sees per-share earnings of $3.13, or $3.10 excluding certain
items. Analysts were expecting per-share earnings of $2.70 in the
second quarter and $10.08 for the year.
Dana Mattioli and Chelsey Dulaney contributed to this
article
Write to Anna Wilde Mathews at anna.mathews@wsj.com and Liz
Hoffman at liz.hoffman@wsj.com
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