By Ankur Banerjee & Ransdell Pierson
(Reuters) – Anthem Inc said on Friday it would buy Cigna Corp for approximately $54.2 billion, creating the largest U.S. health insurer by membership & accelerating the industry's consolidation from five national players to three.
The proposed acquisition, the health insurance industry's largest, comes three weeks after Aetna Inc agreed to buy Humana Inc for $37 billion.
p> Health insurers are finding it tougher to raise prices following the roll-out of President Barack Obama's healthcare law, while grappling with soaring expenses of medications including cancer drugs that can cost each patient more than $100,000 a year. Anthem said buying Cigna would assist it reduce costs & negotiate lower prices with doctors & hospitals.
State insurance regulators & federal antitrust authorities are expected to scrutinize how the Anthem-Cigna & Aetna-Humana deals would affect competition for Medicare & individual & commercial insurance.
Within a few hours of the announcement, several U.S. lawmakers & a leading physicians group said they feared the pending acquisitions would injure consumers by raising prices or limiting access to healthcare providers.
"The lack of a competitive health insurance market allows the few remaining companies to exploit their market power, dictate premium increases & pursue corporate policies that are contrary to patient interests," the American Medical Association (AMA) said in a statement.
Under the deal, which the companies expect to close in the second half of 2016, Anthem Chief Executive Joseph Swedish would serve as CEO & chairman. Cigna CEO David Cordani would be president & chief operating officer.
In a joint conference call, Swedish told analysts Anthem had no prior discussions "at all" with regulators approximately the deal, yet was confident approximately approval.
Shares of Cigna on Friday fell 5.6 percent to $145.72, far below the $188 offered in the buyout, suggesting major Wall Street concern over the antitrust risk.
"Strategically & financially it's very attractive, yet they will face regulatory scrutiny," said Ana Gupte, analyst with Leerink Partners. "They moreover both possibly face divestitures & may have to make concessions to consumers to make the merger go through."
The AMA said its own analysis shows 41 percent of U.S. metropolitan areas already have a single health insurer with a commercial market share of 50 percent or more. It believes the Anthem-Cigna merger would be presumed anticompetitive in at least nine of the states where Anthem operates.
"It is imperative that we closely examine changes in the healthcare market, & what has caused these changes, to ensure that consumers are not harmed," said Senator Mike Lee, a Republican from Utah who is chairman of the Senate's antitrust panel.
Apparent worries approximately regulatory scrutiny have moreover hit Humana shares, which closed at $181.76 on Friday, well below the value of Aetna's cash-and-stock offer of $230 per share when it was announced on July 3.
BIGGER THAN UNITEDHEALTH
Cigna has 15 million members, & approximately 80 percent of its business is with self-insured companies which pay it a management fee, according to Leerink. It moreover serves large & small employers, Medicare Advantage customers & individuals.
About 61 percent of Anthem's 39 million members are served through self-insured companies, while 15 percent have Medicaid coverage. Large & small group policies make up approximately 12 percent of its business, while Medicare Advantage accounts for 1 percent.
The combined company would have approximately 53 million members, surpassing UnitedHealth Group's 45.86 million as of June 30.
Anthem said it will pay $103.40 in cash & 0.5152 of its shares for each Cigna share. The deal is valued at $181.12 per share based on Anthem's Friday close of $150.86.
Anthem said on Friday the offer was valued at $188 per share based on its stock price on May 28 before media reports surfaced that the two companies were in talks.
The offer's equity portion is valued at $49.11 billion, according to Reuters calculations based on 261.2 million Cigna shares outstanding as of March 31.
Another question is whether Anthem would violate rules of the Blue Cross & Blue Shield Association, a federation of 36 independent insurers of which it is the biggest member.
The association collectively insures 106 million Americans. Anthem provides coverage to the most people & operates in 14 states. No other Blue Cross member operates in more than five states.
Blue Cross operators are not supposed to compete with one another, yet Cigna does compete against Blue Cross members in a handful of states, which could cause controversy in the association.
"There will no doubt be debate among the board of directors," said a person knowledgeable approximately Blue Cross who requested anonymity to protect business relationships.
"We will remain Blue," Swedish said on the conference call, adding that Anthem feels confident that even after acquiring Cigna, the combined company will satisfy "the Blue rules."
Swedish said he would serve as CEO for only two years, & remain as chairman afterward. Cordani could be a contender for the CEO role at that point, yet no guarantees were provided, said a source familiar with the matter who requested anonymity because the person was unauthorized to publicly discuss details of the transaction.
Both Anthem & Cigna would be liable to pay the other a fee equivalent to 3.8 percent of the deal's value if either walks away from the planned merger.
Anthem's lead financial adviser is UBS Investment Bank. Credit Suisse moreover served as financial adviser, & White & Case LLP as legal adviser.
Morgan Stanley is Cigna's financial adviser & Cravath, Swaine & Moore LLP its legal adviser.
(Additional reporting by Caroline Humer & Kylie Gumpert in New York & Diane Bartz in Washington)
Health Care IndustryAnthem IncCignaAetna IncHumana IncPresident Barack Obama