Deal Reporter
Anthem (NYSE:ANTM) agreeing to Cigna’s (NYSE:CI) insistence for a larger share of equity over cash was one of the key factors that got the USD 54.2bn transaction over the finish line, a source familiar with the situation said.
Cigna “wanted more equity” because it wanted investors to gain exposure to possible upside in earnings growth and about USD 2bn in forecasted synergies a combined company is expected to accrue, the source said. Much of this is expected to come from reductions to administrative costs for managing plans expected to cover some 53m people. Expectations are that Anthem shares could cross the USD 200 mark in 18 to 24 months following regulatory approvals, the source added.
Shares of Cigna were down 5.8% to USD 145.41 on Friday afternoon, while Anthem shares were down 2.7% to USD 150.95. Anthem shares hit a 52-week high of USD 173.59 just last month as speculation over the combination heated up.
After months of wrangling, Anthem publicly disclosed on 20 June that Cigna had rejected its offer valued at USD 184 per share, comprising 31.4% in Anthem shares and 68.6% in cash.
In the agreed deal announced today, Anthem increased the equity component to 45% with the remainder in cash, which implied an offer of USD 188 per share based on Cigna’s unaffected share price on 28 May.
The offer disclosed today was the culmination of negotiations lasting longer than a year that nearly collapsed over disagreements on price and management roles, the source said. Cigna also dropped its demand that its CEO, David Cordani, be chief executive for the combined company, the source said, which had been a widely reported sticking point to a deal.
An industry investor agreed with Cigna’s reasoning on a higher share component, noting that Anthem’s agreed offer provides Cigna investors with good upside for earnings growth. What was also conducive for a deal was the more defined role offered to Cordani, who will be appointed president and chief operating officer of a combined Cigna/Anthem, the investor said.
By taking its offer public, Anthem took out Cigna from the bidding process for Humana (NYSE:HUM), as it correctly predicted that Cigna shareholders would prefer to take a premium from a takeover than pay one for a deal that would require shareholder approval, the investor said.
Philip Pfrang, global managing partner of life sciences and healthcare for Deloitte & Touche, said administrative costs can be sharply reduced in insurance company mergers, because relative to other industries, a higher percentage of the cost in health insurance is administration. He said mergers in the health insurance industry may actually serve to reduce premiums, which have been rising exponentially in recent years.
“There are massive synergies on the administrative side associated with mergers,” said Pfrang.
The expected closing of the deal is slated for the second half of 2016 to account for a lengthy regulatory review. Because a combined Cigna/Anthem would operate in all states, approval must be sought from regulators in each state in addition to federal approvals.
The deal carries a relatively high 3.8% break fee, or about USD 1.8bn.
However, Anthem has publicly stated that it expects the federal regulatory approval process to be less onerous than the public expects because there is not much overlap its product portfolio. For instance, about 60% of Cigna’s business is in ASOs, or administering healthcare plans on behalf of corporations, not actually insuring individual lives.
Anthem was advised by UBS, Credit Suisse and White & Case, while Morgan Stanley and Cravath, Swaine & Moore advised Cigna.