By Anirban Sen and Deena Beasley
(Reuters) -U.S. health insurer Cigna (NYSE:CI) is in talks to merge with peer Humana (NYSE:HUM), a source familiar with the matter said on Wednesday, a deal that could exceed $60 billion in value and would be certain to attract fierce antitrust scrutiny.
The discussions come six years after regulators blocked mega-deals that would have consolidated the U.S. health insurance sector.
After U.S. courts upheld antitrust challenges in 2017, Cigna gave up on a $48 billion deal to acquire Anthem -- now known as Elevance Health. Losing the legal battle also caused Aetna -- now owned by pharmacy chain operator CVS Health (NYSE:CVS) -- to abandon a $37 billion deal to acquire Humana.
Cigna and Humana are discussing a stock-and-cash deal that could be finalized by the end of the year, according to the Wall Street Journal, which first reported on the potential deal earlier on Wednesday. Humana declined to comment, while Cigna did not respond to requests for comment.
A merger would give the combined company more scale to rival bigger U.S. health insurance players UnitedHealth Group (NYSE:UNH) and CVS Health.
Cigna and Humana, which have market values of $77 billion and $59 billion, respectively, currently have limited business overlap, concentrated in Medicare plans for older Americans.
Humana's Medicare business is much bigger and more profitable than Cigna's. Reuters reported earlier this month that Cigna was exploring a sale of its Medicare Advantage operations, whose performance has disappointed investors. This divestment could boost the chances of a combination with Humana surviving antitrust challenges, regulatory lawyers said.
"It would be smart to do it even before announcing the deal," said Andre Barlow of Doyle, Barlow and Mazard PLLC.
Limited overlap between the companies, however, typically also means there are limited cost and revenue synergies. Cigna's shares ended trading on Wednesday down 8.1%, amid investor concerns that the company could overpay for Humana, which trades at higher valuation multiples.
Humana is trading at 18.2 times price-to-earnings, while Cigna is trading at 11.6 times, according to LSEG data. Humana's shares also traded down, dropping 5.5% for the day, as investors question the ability of Cigna, which carries $21.5 billion in net debt, to come up with a premium for the deal.
"The regulatory burden, dilutive impact, and long time to close will impact the market's reaction to the deal," Oppenheimer analysts said in a note to clients.
The limited synergies will also add pressure on Cigna CEO David Cordani to deliver value by running Humana better than its current management. Humana is in the midst of a leadership transition after CEO Bruce Broussard announced in October he will step down in the second half of 2024 after more than a decade at the helm. Humana has tapped Jim Rechtin from Envision Healthcare, a U.S. provider of physicians where he is CEO and president, as successor.
HIGHER MEDICAL COSTS
Cigna has a large pharmacy benefit unit, Express Scripts, which manages prescription drug plans and has strength in commercial insurance. Humana is the second-biggest player in the fast-growing market for Medicare Advantage plans, under which private insurers are paid a set rate to manage healthcare for people age 65 and older or with disabilities.
Health insurers have been facing higher medical costs as people return for procedures they had put off during the pandemic. They are also feeling pressure on reimbursement from the U.S. government.
Humana in February said that it would sell its commercial business but keep its Medicare Advantage products.
Assuming Cigna does sell its Medicare Advantage business, Bernstein analyst Lance Wilkes said in a research report that antitrust authorities may look at the impact on pharmacies and suppliers of combining their pharmacy drug benefit management (PBM) businesses. Humana manages drug benefits for Medicare, while Cigna's Express Scripts is one of the country's biggest PBMs.
Craig Garthwaite, a healthcare economist at Northwestern (NASDAQ:NWE) University, said he expects antitrust authorities to challenge the merger, but that a sale of Cigna's Medicare Advantage (MA) business would improve the deal's prospects.
"If you are going to try to prepare to be a better match with Humana from a regulatory standpoint, them dropping MA would make it a lot easier," he said.