After a number of mergers and acquisitions in the insurance sector of late, it is now turn for Humana Inc. HUM, one of the top five players in the health insurance space, to be purchased. The Medicare Advantage giant is set to be acquired by Aetna, Inc. AET, which is currently one of the top three health insurers, to form a combined company.
The combination of the two majors positions the combined entity as second-largest managed care company in the US.
The deal is valued at $37 billion or $230 per share and is scheduled to close by the second half of 2016. Per the terms of the agreement, which has been unanimously approved by the board of directors of each company, Humana’s shareholders are slated to receive $125 in cash and 0.8375 Aetna shares for each Humana share. On closing, Aetna will own 74% of the combined entity, while Humana will hold the remaining 26%.
The cash portion of the deal will be funded by a combination of cash on hand and issuance of new term loans, debt and commercial paper worth approximately $16 billion. The combined company’s debt-to-capital ratio is expected to be approximately 46% on culmination of the deal. Nevertheless, management remains optimistic that it will be able to take this ratio below 40% within two years of the closing of the transaction. Moreover, synergies from the transaction are expected to be around $1.25 billion annually in 2018.
The two companies together are expected to generate operating revenues worth approximately $115 billion in 2015. Though the transaction is unlikely to be accretive on Aetna’s operating EPS in 2016, it is projected to produce mid-single digit percentage EPS accretion in 2017 and low double-digit percentage accretion in 2018.
When it comes to what the deal has to offer to the customers, it is needless to say that the combined entity will cater to the requirements of customers more competently as it combines the expertise and portfolios of two of the largest names in the industry. Consumers will be able to avail health care products that are not only tailored to keep expenses in check but also deliver improved health outcomes and promote wellness. In particular, people with chronic conditions will be highly benefited from Humana’s home health, pharmacy management, and data analytics programs.
Apart from enhancing value for customers, the combined entity will be able to capitalize on the brand name and goodwill of both the merged companies. This would, therefore, enable the combined company to make profitable investments and strengthen partnerships with service providers, going forward.
In order to capitalize on the benefits of the Affordable Care Act and optimize profits, health insurers are focusing on increasing their operational scale. This will help them to win better terms from medical providers. Amid the rapidly changing health care industry, the merger of Aetna and Humana reflects this strategy. Among other big names in the health insurance space, Anthem, Inc. ANTM is considering a similar deal. The company has put forward a proposal to acquire Cigna Corporation CI.
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