Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Congratulations, Humana Inc.! You've just won $1 billion. What are you going to do with it?

The health insurer officially called off its sale to Aetna Inc. on Tuesday as the two mutually agreed not to appeal a court ruling that the tie-up would have been anti-competitive. The $1 billion break-up fee Humana will receive ($630 million after tax, don't you hate when that happens?) is a small consolation prize for a deal that would have handed shareholders a premium and a slice of a stronger, combined company. But it does open up opportunities for the $31 billion managed-care provider. Humana was so excited for the chance to spend its cash on takeovers of its own that it jumped the gun a bit and posted a job listing for an M&A analyst before the deal with Aetna was canceled.

Long Odds
Investors were never optimistic that Aetna's $37 billion takeover of Humana would get approved
Source: Bloomberg

The company is right to hurry. Anthem Inc. is dragging the carcass of its $50 billion-plus takeover of Cigna Corp. into an appeals process as it tries to save the merger, or perhaps find a way to get out of paying the $1.85 billion breakup fee it owes its target.  The deadline for Anthem to save its Cigna deal is April 30, which gives Humana a short window to pursue targets before the number of competing bidders balloons. Cigna has said it may have as much as $14 billion to deploy and Anthem will be able to out-muscle Humana for just about any acquisition; the company received commitments for more than $25 billion in financing for the Cigna takeover, after all. Even Aetna could be a rival and is likely already on the hunt for a successor deal as well; it will have plenty of financial firepower left over after paying out Humana's breakup fee. 

Flush with Cash
The breakup fee will grow Humana's cash to the highest level in at least 20 years
Source: Bloomberg

With or without competition, Humana is going to need all the M&A analysts it can get because there are slim pickings for takeovers. The remaining deal options will require the company to pick winning insurance markets at a time when the future of the industry is simply a guessing game. Centene Corp. and Molina Healthcare Inc.'s heavy exposure to the Affordable Care Act exchanges that Humana has already been distancing itself from would seem to make those companies a no-go. 

Even if Humana were willing to take an ACA gamble, Centene may just be too big. The company's current market value of $12 billion matches what Bloomberg Intelligence estimates Humana has in M&A capacity. Tacking a premium onto that would push the target out of reach. Centene may be a more reasonable target for Humana’s ex-Valentine Aetna.

The potential targets that focus on safer and growing industries -- such as WellCare Health Plans Inc. and its soon-to-be much larger Medicare Advantage business (thanks to its pending purchase of Universal American Corp.) -- are going to be expensive. With WellCare trading near a record, Humana would have to come up with several hundred million dollars of synergies to make an all cash deal meaningfully accretive at a standard 30 percent premium, according to Bloomberg's merger calculator.

Worth the Cost?
WellCare's revenue growth is set to outpace that of Humana over the next few years. At least part of that is due to WellCare's acquisition of Universal American.
Source: Bloomberg

With Wellcare, Humana also risks reopening antitrust wounds. Assuming the Universal American takeover goes through, a combination of WellCare and Humana could create the largest Medicare plan provider. As a total wild-card move, Humana could try to lob in a counterbid for Universal American, although that deal is far along and the odds of that effort succeeding are slim. And with 114,000 Medicare Advantage members and $1.4 billion in annual revenue, a Universal American deal wouldn't exactly be a game changer for Humana.

A Humana-WellCare tie up would create the largest U.S. Medicare insurer
Source: Bloomberg Intelligence
*Universal American has not reported full year 2016 results, 2015 enrollment used.

Other insurer acquisitions could be even smaller, and following UnitedHealth Group Inc.'s path of diversification into other businesses is no easy proposition either given how unsettled the health care industry is. 

Humana has the means to jump back into the health insurance M&A frenzy, but it might still walk away empty-handed. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Brooke Sutherland in New York at
Max Nisen in New York at