Anthem to Buy Cigna to Create Largest U.S. Health Insurer

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By Ankur Banerjee and Ransdell Pierson

Anthem (ANTM) has agreed to buy Cigna for about $54.2 billion, a deal that would create the largest U.S. health insurer by membership and accelerate the consolidation of an industry from five national players to three.

The proposed acquisition -- the biggest ever in the health insurance industry -- comes three weeks after Aetna (AET) agreed to buy Humana (HUM) for $37 billion.

Health insurers are finding it tougher to raise prices following the rollout of President Barack Obama's health care law, while grappling with soaring costs for a growing list of innovative new medications such as some new cancer drugs that cost $100,000 annually for patients.

%VIRTUAL-pullquote-Strategically and financially it's very attractive, but they will face regulatory scrutiny.%State insurance regulators and federal antitrust authorities are expected to aggressively scrutinize how both of the proposed health insurer acquisitions will affect competition for Medicare and individual and commercial insurance.

Under the deal announced Friday, which the companies expect to close in the second half of 2016, Anthem Chief Executive Officer Joseph Swedish would serve as CEO and Chairman of the combined company. Cigna CEO David Cordani would be president and Chief Operating Officer.

In a joint conference call with industry analysts, Swedish said that Anthem has had no discussions "at all" with regulators ahead of the deal announcement, but was confident it will receive their approval.

Shares of Cigna (CI) were trading Friday at $147.64, far below their $188 a share value under the announced deal, suggesting significant Wall Street skepticism over whether it will survive antitrust scrutiny.

"Strategically and financially it's very attractive, but they will face regulatory scrutiny," said Ana Gupte, analyst with Leerink Partners. "They also both possibly face divestitures and may have to make concessions to consumers to make the merger go through."

The same apparent wariness of approval has been seen with Aetna's planned purchase of Humana. Humana shares are trading in the $183 range, well below the value of Aetna's cash-and-stock offer of $230 a share when it was first announced.

Both Anthem and Cigna would be liable to pay the other a fee equivalent to 3.8 percent of the deal's value if either of them walk away from the planned merger.

Bigger Than UnitedHealth

Anthem and Cigna are two of just four major insurers that administer self-insured plans for major companies. The other two are UnitedHealth Group (UNH) and Aetna. The combined company would have about 53 million members. UnitedHealth had 45.86 million members as of June 30.

Growing concerns about market concentration came into sharp focus earlier this year when regulatory concerns scuttled Comcast Corp's $45 billion bid for Time Warner Cable Inc.

Anthem said it will pay $103.40 in cash and 0.5152 of its shares for every Cigna share. The deal is valued at $183.36 a share based on Anthem's Thursday close of $155.21. Anthem said the offer is valued at $188 a share, based on its unaffected share price as of May 28 before media reports surfaced that the two companies were in talks.

The equity portion of the offer is valued at $49.11 billion, according to Reuters calculations based on 261.2 million Cigna shares outstanding as of March 31.

Swedish said Anthem's mainstay Blue Cross/Blue Shield insurance coverage requires the company to maintain a concentrated focus on that business, according to Blue Cross rules.

"We will remain Blue," Swedish said on the conference call, adding that Anthem feels confident that even after acquiring Cigna and its core Medicare Advantage plans, the combined company will satisfy "the Blue rules."

The company has said the deal will help it reduce costs and allow it to negotiate lower prices with doctors and hospitals.

[The] spirit of our collaboration going forward is total collaboration," Swedish said, saying his and Cordani's different roles and responsibilities "are perfectly aligned."

Swedish said he intended to remain CEO of the combined company for two years, and afterward become chairman.

Anthem's lead financial adviser is UBS Investment Bank. Credit Suisse (CS) also served as financial adviser, and White & Case as legal adviser.

Morgan Stanley (MS) is Cigna's financial adviser and Cravath, Swaine & Moore its legal adviser.

-Diane Bartz in Washington, and Caroline Humer and Kylie Gumpert in New York contributed reporting.
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