The Cigna–Anthem Deal: What’s in It for Cigna?



Cigna–Anthem deal

Based on precedent transactions, the Cigna–Anthem deal, if effective, is expected to realize cost synergies worth $2 billion for the combined entity. Because the membership of the Cigna–Anthem combined entity is substantially greater than that of Cigna alone, the economies of scale can be fully exploited to achieve a leaner operating cost structure.

The above graph shows the total membership count of the combined Cigna (CI) and Anthem (ANTM) entity, which should exceed that of the largest health insurance player, UnitedHealth Group (UNH). Other companies such as Humana (HUM), Aetna, and Health Net have substantially lower memberships than the combined Cigna–Anthem entity.

Cost synergies

An increase in membership is expected to introduce operational efficiencies, as well as reduce the per-member administrative costs. This should also help the combined entity benefit from increased collaboration of its healthcare provider networks.

A higher number of the healthcare providers in key geographies will be included in Cigna–Anthem’s network, further boosting the attractiveness of the combined entity’s health insurance policy and the entity’s total membership.

Additionally, Anthem and Cigna can coordinate their specialty businesses and achieve cost efficiencies. Cigna is also expected to benefit from Anthem’s unique capabilities in the dual eligible segment, which involves people eligible for both Medicare and Medicaid.

Although Cigna has a limited presence in the growing market, Anthem has been actively entering new markets to serve this segment. While synergies also exist in the pharmacy benefit management (or PBM) business of the combined entity, it has not been accounted for by Anthem’s management.

Consolidation environment

On June 15, 2015, Anthem made its first offer to buy Cigna at $175 per share, which amounted to a total consideration of $45 billion. After the rejection by Cigna, Anthem upped its offer to $184 per share for a total consideration of $47.5 billion in cash and stock—$54 billion including Cigna’s debt. The offer is at a 37.5% premium to Cigna’s unaffected price of $135.87 on May 28, 2015.

Cigna has officially rejected the new offer, citing reasons such as Anthem’s weak growth strategy, the unfavorable fallout related to its data breach, and complications related to Anthem’s Blue Cross Blue Shield membership.

However, the Aetna–Humana deal announced on July 2, 2015, has changed the situation for Cigna. The health insurance arena is now left with only two other major players, UnitedHealth Group and Anthem. As the Aetna–Humana deal makes the combined entity a stronger player, Cigna is also expected to opt for consolidation to increase its scale. Cigna is also left with fewer options to exercise its consolidation strategy. Anthem’s offer of $184 per share might finally lead to a culmination of the Cigna-Anthem deal.

To benefit from the deal, investors can get diversified exposure to Anthem by investing in the Health Care Select Sector SPDR ETF (XLV), which holds 1.49% of the stock.

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