By Dana Mattioli, Anna Wilde Mathews and Chelsey Dulaney
Anthem Inc. agreed to buy Cigna Corp. for $48.4 billion in a
transaction that, along with a previously proposed combination of
rivals, could reshape the U.S. health-insurance industry.
The deal, which follows months of speculation and at-times
contentious talks, combines the second- and fifth-largest health
insurers by revenue and merges two companies 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, which would
give it the largest medical membership in the industry. The 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 at the top of
the U.S. managed-care industry. 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 five largest 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. Cigna shareholders will receive $103.40 in
cash and 0.5152 Anthem shares for each share held. Including debt,
the deal is valued at $54.2 billion.
The deal requires government approval, and legal experts have
said regulators are likely take a close look at the recent deals in
the health-insurance industry. The companies said Friday that they
expect the deal to close in the second half of 2016.
In a sign that investors have doubts about the deal's prospects,
Cigna shares are trading well below the offer price. In midday
trading, Cigna shares fell 4.8% to $146.96, while Anthem shares
dropped 2.9% to $150.79.
Anthem Chief Executive Joseph Swedish will remain CEO and add
the chairman title, while Cigna CEO David Cordani will become
president and operations chief. The role Mr. Cordani would hold in
the combined company had been a sticking point in deal talks.
Anthem estimates that the deal will grow its per-share earnings
by 10% in the first year after closing, with accretion more than
doubling by the second year.
Anthem shareholders will own 67% of the combined company, while
Cigna shareholders will 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 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 particular point of contention has been
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,
worth $184 a share, calling it "inadequate and not in the best
interests of Cigna's shareholders."
Anthem, which is a Blue Cross and Blue Shield plan in 14 states,
has a commanding presence, particularly in individual and
small-employer plans, but also is a major player in serving large,
multistate employers, which it does in partnership with other
Blue-plan companies around the country.
Cigna is known for its focus on administering coverage for large
employers, as well as a burgeoning overseas presence. With its 2012
acquisition of HealthSpring, Cigna also bolstered its Medicare
business, which currently includes nearly 500,000 members. Anthem
has 618,700 people enrolled in its Medicare Advantage plans, the
private-insurer version of the federal program.
Anthem is projecting about $2 billion in annual synergies within
two years of closing, as it combines administrative structures and
realizes medical-management and network efficencies. Anthem expects
the deal also will make its services more competitive and
affordable, with increased scale reducing costs for things like
outpatient surgery and emergency room visits.
The rapid reshuffling of the industry will likely present a
challenge for the Obama administration, which views the health law
as its signature domestic achievement. Antitrust regulators are
expected to closely examine the implications of the two tandem
deals and a third, smaller transaction announced earlier this
month.
The Cigna deal, coming so soon after Aetna's announcement, could
up the ante for regulators at both the state and federal levels.
Anthem said its deal will by subject to regulatory approval from
state insurance departments and under the Hart-Scott-Rodino
antitrust act. 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.
Anthem also might face challenges because of its role as a
licensee of the Blue Cross Blue Shield Association. To use the Blue
brands, Anthem must adhere to the association's rules. 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.
Anthem's Mr. Swedish has said the company is "confident in our
ability to obtain regulatory approvals," including from the Blue
association, and that "no substantive antitrust or insurance
regulatory issues are present that would prevent completion of the
transaction."
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.
By 2018, Anthem forecast that its adjusted earnings could grow
to $17 a share.
Liz Hoffman contributed to this article.
Write to Dana Mattioli at dana.mattioli@wsj.com, Anna Wilde
Mathews at anna.mathews@wsj.com and Chelsey Dulaney at
Chelsey.Dulaney@wsj.com
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