Investors Not Buying Anthem-Cigna Deal
Earlier this week, I wrote that merger arbitrage spreads indicated investors are not convinced the spate of recently announced takeovers among health insurers will close. Today’s news that Anthem (NYSE:ANTM) and Cigna (NYSE:CI) have agreed to takeover terms does not change that story.
Anthem’s original (hostile) bid was for $184 per share. Today’s is a minor bump, of $188 per share. The big difference is the mix of cash versus Anthem stock. The original bid was $126.22 in cash, versus only $103.40 today. Today’s bid includes 0.515 shares of Anthem stock, significantly higher than the previous bid.
The joint announcement claimed the new bid was at a premium of 38.4 percent of Cigna’s unaffected price. However, prices of both shares used for valuation in the announcement were May 28 closing prices.
As of today’s close, the share prices indicate investors went home for the weekend with a 22 percent return on shorting the spread between the two stocks (including a net short dividend of $1.25 per Cigna share), anticipating the deal closing in one year. This spread is significantly higher than I reported in my earlier article, when it was 17 percent.
For non-investors: The merger arb spread refers to buying shares of Cigna and shorting shares of Anthem, covering the short sale by delivering Cigna shares to receive Anthem shares when the deal closes. A rate of return of 22 percent indicates investors believe there is a lot of risk that this deal will not close.
As previously indicated, I believe the biggest risk is that politicians and regulators do not want to take responsibility for the consolidation of health insurers in to an oligopoly, in the wake of Obamacare.
It’s true that there is a lot of regulatory risk in the Anthem-Cigna and the Aetna-Humana deal. It seems odd to me, though, that regulators would be so upset about increased market concentration in the health insurance sector when they didn’t seem the least bit concerned about it in the hospital sector which has been consolidating for years. The insurers need this consolidation to build countervailing power not just against hospitals but against drug and device manufacturers as well. Health insurance is expensive because healthcare is expensive. If regulators want to increase the likelihood of slowing the rate of healthcare cost growth, they will give both of these deals their blessing.
“Health insurance is expensive because healthcare is expensive.”
Bingo. Perhaps even more specifically, medical insurance is expensive because medical care is expensive. Either way, the latter drives the former – not the other way around.
So long as policy makers ignore this fact by enacting insurance mechanisms that they tell us will somehow “bend the cost curve” – medical cost will continue upward.
And so long as the general media, leading pundits, and other so-called thought-leaders believe the problem is cost of insurance rather than cost of medical care, solutions won’t be found because everyone is looking in the wrong places.
That is the sad experience of the past 50 years – and of course, of the past 75 months too.
It is a feedback loop. Why is health care expensive? Because there is too much insurance and not enough patient power.