Health Insurer Acquirers Get No Reward for Dealmaking: Real M&A

Investors aren’t giving much love to the latest dealmakers in health insurance.

After announcing a $37 billion acquisition of Humana Inc., Aetna Inc. plunged 6.4 percent on Monday, its biggest one-day drop in three years. Meanwhile, Centene Corp. had its worst two-day period since 2012 after saying on July 2 that it would buy Health Net Inc. for $6.8 billion, including debt.

Both Aetna and Centene were considered targets in their own right, which is one reason for the stock slides. Now that the companies are buyers, investors are sucking the takeover premiums out of their shares.

“The M&A chatter, while it’s really ramped in the last month or so, has been ongoing for the last year-plus,” said Chris Rigg, an analyst at Susquehanna International Group. “Now these deals are coming to fruition and some people might be asking, ‘What’s next?’”

In an interview on Bloomberg Television Tuesday, Aetna Chief Executive Officer Mark Bertolini said traders who bet on deals, known as arbs, are to blame for the recent share-price plunge.

“It’s the arbs that got in the deal looking for opportunity, and I’m not quite sure they know how to do this trade,” Bertolini said. “We’re going to have to let the kind of shareholders who value this deal find their way through it.”

The industry may also be headed for a rough patch. Humana on Monday lowered its 2015 earnings forecast because of higher-than-expected claims for its Medicare Advantage business. That raises the risk that Aetna overpaid, though the company says it became aware of Humana’s performance in the due diligence process. Aetna agreed to a 23 percent premium to Humana’s July 2 closing price, which already included gains from takeover speculation.

Diversification

Aetna dropped less than 1 percent to $114.26 at 10:11 a.m. New York time on Wednesday, while Centene rose less than 1 percent to $70.64.

For Centene, the purchase of Health Net will add to its offerings in insurance sold through the government’s Medicare and Medicaid programs. Yet the new, bigger Centene likely won’t be able to grow as quickly as the old Centene did, said Jennifer Lynch of Bank of Montreal

“It would have taken a very long time and been a complex process for Centene to have gained a material footprint in California Medicaid, and now they get that with this transaction,” Lynch said when the deal was announced. “But I also think the profile of the businesses that they’re acquiring don’t have quite as attractive of a growth rate.”

Then there’s the antitrust risk. While Centene and Health Net shouldn’t have a difficult time with U.S. regulators, Aetna and Humana will need to make divestitures. The companies will probably have to shed about 575,000 of their 4.4 million Medicare Advantage members in markets where the combined firm would be too dominant, said Brian Wright of Sterne Agee CRT.

Another Deal

A third potential purchase is looming: Anthem Inc. is still pursuing Cigna Corp. after being rebuffed last month. Regulators may balk at approving three mergers, particularly because they involve six of the seven largest publicly traded U.S. health insurers. That puts all of the deals at risk.

Even so, the drop in Aetna’s shares may be overblown, said Ana Gupte, an analyst at Leerink Partners. While shareholders who had been hoping for a takeover by UnitedHealth Group Inc. may be disappointed, Aetna’s estimates for cost-savings and other synergies in the Humana deal are conservative, she said.

The conventional wisdom used to be that acquirers’ stocks sell off after a deal is announced. That still happens, especially when purchases are expensive. AbbVie Inc. dropped 5.7 percent after agreeing in March to pay a well-above-average valuation for Pharmacyclics Inc.

Going Up

Still, many acquirers have been rising on deal news as companies take advantage of low interest rates or put stockpiles of cash to work.

The trend has been particularly apparent among drugmakers. Pfizer Inc. jumped 2.9 percent on the day it announced a $17 billion takeover of Hospira Inc. -- its priciest large purchase this decade. And Actavis Plc jumped 1.7 percent the day it said it would spend $66 billion to buy Allergan Inc.

Actavis, which took the name Allergan, is still seen as a potential target. That’s not the case for health insurers.

“In the health plan space, you’re dealing with a much more finite space of potential further deals,” Wright of Sterne Agee CRT said.

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