Aetna Inc. agreed to buy rival health insurer Humana Inc., paying about $35 billion in cash and stock for the second-largest U.S. provider of private health plans for the elderly.
The transaction, which prices Humana at $230 a share, combines the second- and fifth-largest U.S. health insurers by market size. The deal values Louisville, Kentucky-based Humana at 23 percent more than its closing price on Thursday, and including assumed debt totals about $37 billion.
The acquisition is part of a merger frenzy as the five biggest U.S. health insurers look to get bigger. The 2010 health reform law known as Obamacare spurred deals by introducing rules that push insurers to look for savings, and by creating millions of new customers. Humana’s 3.2 million Medicare Advantage members made it a target: it’s winning new business as more Americans turn 65 and become eligible for the health program for the elderly and its private insurer-run version.
“The future of health insurance in the U.S. is enrolling publicly funded people,” Jeff Goldsmith, the president of consultant Health Futures, said by phone. “Doubling down on Medicare Advantage is a really good bet.”
Terms of Deal
Humana shareholders will receive $125 in cash and 0.8375 of an Aetna share for each of Humana’s. The companies expect the deal to close in the second half of 2016. Aetna Chief Executive Officer Mark Bertolini will be chairman and CEO of the combined company, which will remain in Hartford, Connecticut. It’s too early to say what roles other executives will take, Tom Noland, a Humana spokesman, said by phone.
Together, Aetna and Humana would have more than 33 million health-insurance customers and about $115 billion in annual revenue, creating the No. 2 U.S. health insurer by sales, after UnitedHealth Group Inc. Aetna specializes in commercial coverage, while Humana is a leader in Medicare.
“The assets and the strengths of the companies are very complementary,” Shawn Guertin, Aetna’s chief financial officer, said by phone.
Medicare membership is projected to rise to 68.4 million in 2023, up 26 percent from this year, according to the Centers for Medicare & Medicaid Services. About a third of those people are now enrolled in Medicare Advantage, and Goldsmith said that half of the elderly may eventually buy private plans.
Aetna fell 2.6 percent Thursday to $125.51 in New York trading, while Humana dropped 2.9 percent to $187.50. U.S. financial markets are closed today for the Independence Day holiday. The companies plan a conference call Monday at 8:30 a.m. New York time to discuss the deal.
The transaction is poised to be the biggest ever in the health-insurance industry, according to data compiled by Bloomberg.
Still, it may soon be surpassed. Cigna Corp. last month rejected a $47 billion bid from Anthem Inc., saying the offer wasn’t in the best interests of shareholders and that Anthem executives weren’t fit to lead a merged insurance giant. The combined company would be the biggest in the U.S. by customers, topping UnitedHealth. Minnetonka, Minnesota-based UnitedHealth had considered whether to pursue deals with Cigna or Aetna, the Wall Street Journal reported last month.
Centene Corp. on Thursday agreed to buy Health Net Inc. for about $6.3 billion in a deal that creates the biggest private administrator of Medicaid, the federally funded health program for the poor. Obamacare, formally known as the Patient Protection and Affordable Care Act, helped expand the Medicaid program to more people.
The law also provides subsidies to help people afford private insurance coverage, and requires that insurers spend about 80 percent to 85 percent of their premium revenue on health-care claims.
A Supreme Court ruling upholding those subsidies for more than 6 million people helped clear the path to dealmaking. The 6-3 decision on June 25 in the King v. Burwell case said the U.S. can continue to give people money to help them buy coverage on the federal healthcare.gov website.
Aetna said that while it will maintain its Hartford headquarters, government programs including Medicare, Medicaid and coverage sold to military members will be based in Louisville.
The companies said cost savings from the transaction will be $1.25 billion a year by 2018, while cumulative integration costs will be about $1 billion through 2019. By 2018, the transaction should increase operating earnings by a low double-digit percentage, excluding costs tied to the transaction and integration, the companies said in a presentation.
The breakup fee is $1 billion if the deal fails for regulatory reasons, Aetna spokeswoman Cynthia Michener said.
The transaction comes on the heels of major deals for both Humana and Aetna. Aetna completed the $8.7 billion acquisition of Coventry Health Care Inc. in May 2013, adding 3.7 million medical members. Humana earlier this year divested its occupational health business, called Concentra, in a $1 billion deal.
Citigroup Inc. and Lazard Ltd. provided financial advice to Aetna, while Davis Polk & Wardwell LLP is acting as legal adviser. Goldman Sachs Group Inc. gave financial advice to Humana and Fried, Frank, Harris, Shriver & Jacobson LLP is its legal adviser.