Anthem Proposes to Buy Rival Insurer Cigna for $47 Billion

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Why Anthem Wants Cigna So Badly

Anthem Inc. offered to buy smaller health insurer Cigna Corp. for about $47 billion in what would be the industry’s biggest takeover ever.

The non-binding proposal is for $184 a share, about 31 percent of which would be paid in Anthem shares and the rest in cash. That’s a 29 percent premium to Cigna’s average closing price in the past 20 trading sessions. Anthem said Saturday that the total transaction value is $53.8 billion, including net debt.

The merged entity would be about 24 percent owned by Cigna shareholders and would serve about 53 million members. Cigna has “no comment at this time,” said Matt Asensio, a spokesman for the company.

“It’s a decent premium,” Thomas Carroll, an analyst for Stifel Financial Corp., said in a phone interview. “The question investors will have now is how does this news change all the M&A speculation that’s out there swirling about?”

Health insurance companies are on the verge of a consolidation wave much like the pharmaceutical industry has been experiencing. Companies such as Anthem are searching for ways to cut costs and keep expanding profits amid a surge in enrollment from the Patient Protection and Affordable Care Act, also known as Obamacare.

Aetna Inc. made a takeover proposal to Humana Inc. in the past few days, the Wall Street Journal reported on Saturday, without saying where it got the information. Humana had a market value of $30.3 billion on Friday, compared with Aetna’s $43.3 billion.

Humana, WellCare

Anthem, valued at $43.5 billion, was considering a takeover of Cigna or Humana, a person familiar with the matter said earlier this month. Stifel’s Carroll said he was surprised that it chose Cigna because Humana’s Medicare expertise would have been a good complement to Anthem, which focuses more on Medicaid. Medicare is the federal health program for the elderly and disabled, while Medicaid covers the poor.

Analysts have said that if Anthem chose to target Cigna, then Aetna might pursue Humana. It’s also possible that industry leader UnitedHealth Group Inc. acquires Aetna, leaving Humana without a suitor, Carroll said. WellCare Health Plans Inc., a smaller provider with a market value of $3.9 billion, is also considered by analysts to be a takeover candidate.

Anthem said Saturday that combining with Cigna would boost adjusted earnings by more than 10 percent in the first year. Together, they’ll generate more than $115 billion in annual revenue.

A $53.8 billion enterprise value for Cigna would be about 14 times what the company earned before interest, taxes, depreciation and amortization in the past 12 months. That’s more than double Anthem’s own Ebitda multiple.

Merger Hurdle

“This combination is the absolute best strategy for both organizations to maximize the potential and lead the transformation of the health care industry,” Anthem Chief Executive Officer Joseph Swedish said in the statement.

Anthem said it had held discussions with Cigna about a merger since August 2014 and has made four written proposals this month, starting with an offer of $174 a share on June 3. It made its latest bid public after the talks hit a snag over who will run the company and who will serve on the board. Anthem said it offered to name Cigna’s CEO, David Cordani, as president and chief operating officer of the combined entity, as well as co-chairman of the integration team. But Cigna insisted on Cordani remaining CEO, Anthem said.

Anthem spoke of “unreasonable governance demands” and urged Cigna to “return to negotiations to reach a mutually agreed-upon transaction.”

Golden Parachutes

Anthem is “holding Cigna’s board’s feet to the fire to make a decision,” Stifel’s Carroll said. “If this deal does ultimately happen, it will certainly put pressure on some of the other players.”

Of the top executives at the three biggest potential targets, Aetna CEO Mark Bertolini has the most to gain from an acquisition. He could receive $131.3 million should he lose his job in a takeover, according to data compiled by Bloomberg. Cigna’s Cordani would get $58.7 million, while Humana CEO Bruce Broussard’s so-called golden parachute is valued at $26.1 million.

UBS AG is working as Anthem’s financial adviser, and White & Case LLP is its legal counsel.

The entire health-care industry has been on a takeover spree, from medical-device companies and drug makers to hospitals, said Jason McGorman, an analyst for Bloomberg Intelligence. A record $330 billion of mergers and acquisitions were announced in the industry last year, and 2015 is already on pace to top that level, data compiled by Bloomberg show.

“It’s the battle between the provider versus the payer,” McGorman said in a phone interview. “Insurers may be looking to partner up because fewer plans means they can raise premiums or have more leverage with hospitals. They can also just add new capabilities and geographics.”

As for the Anthem-Cigna deal, “this isn’t the end,” he said.

(An earlier version of this story was corrected to reflect the deal terms as a mix of shares and cash.)

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