Aetna's Merger with Humana Foiled by Regulators, Stock Down

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Federal authorities reviewing the proposed Aetna Inc.AET and Humana Inc.HUM mega merger have now blocked the deal. The reviewers have cited concerns that the merger would lead to higher prices and throttle competition in Medicare Advantage markets in 364 counties across 21 states and in the health care exchanges of 17 counties in three states.

The news sent shares of Aetna down 2.72% on Monday and trading finally closed at $119.20.

Announced in Jul 2015, and originally expected to close in the second half of 2016, the $37-billion, stock-and-cash deal, if finalized, would have united two major players in the health insurance industry and created the second-largest managed care company in the U.S. Also, it would have enhanced Aetna's presence substantially in the rapidly growing Medicare market.

Regulator's Stance

The U.S. Justice Department filed a lawsuit last July to block the merger. Since that date till now, shares of the company have performed poorly returning a meager 0.76% compared with a gain of 9.36% for the Zacks categorized Health Maintenance Organization (HMO) industry. The share price performance is reflective of the pessimism that surrounded the stock over the merger-related uncertainty and investor perception that it may finally be blocked.

Coming back, the deal has received a "no" from Judge Bates of the U.S. District Court for the District of Columbia. He reasoned that if the companies were allowed to merge, federal regulation would not be able to hold them back from raising premium or reducing services. Also, the entry of any player would not be enough to counter the competition posed by the merged entity. This will go against the interest of not only consumers but also the other sections of the industry such as hospitals and physicians since the combined company will have more power to bargain with them.

Divestiture Proposals

As part of their efforts to address competition and win U.S. regulatory approval for the merger, Aetna and Humana were prepared to sell Medicare Advantage assets worth $117 millionto Molina Healthcare Inc.These were Aetna Medicare Advantage plans in Alabama, Arkansas, Florida, Georgia, Illinois, Louisiana, North Carolina, Nevada, Ohio, Oklahoma, Texas, Virginia and West Virginia, and certain Humana plans in Delaware, Illinois, Iowa, Kansas, Missouri, Nebraska, Ohio, Pennsylvania, South Dakota and Utah. These divestures were, however, deemed insufficient by DOJ to keep the space competitive.

Way Ahead

Notwithstanding the latest hit to the merger, Aetna is planning to appeal the case. Aetna and Humana claim that the merger will help them to add scale to their business and cut unnecessary costs incurred in duplication of services provided to patients. They believe that the combination will result in a broader choice of products, allow access to higher quality and more affordable care, and lead to better overall experience for consumers.

Aetna said earlier that it has some back up plans in case the deal doesn't get through. It may look to expand in Medicaid, by way of acquiring Medicaid-centric companies such as Molina, Centene Corp. or WellCare Health Plans Inc.

Will Trump's Administration Help the Deal?

One possibility, though slightly remote, for Aetna would be to wait for new antitrust enforcement officials to be appointed by Trump, with whom the company can strike some accord to save the merger. The antitrust enforcement under Barack Obama's was aggressive and a number of mega mergers torpedoed under it including the those of Halliburton Co. HAL and Baker Hughes Inc. BHI , and Staples Inc. with Office Depot Inc.

If the deal doesn't materialize, Aetna will have to pay $1 billion in severance charges to Humana, as per the terms of the merger.

The judgement on the Aetna-Humana deal also gives indication of a likely adverse outcome of another pending mega merger between Anthem Inc. ANTM and Cigna Corp. CI worth $48 billion. This was also challenged by the Justice Department along the same lines and is awaiting a ruling.

Aetna carries a Zacks Rank #4 (Sell).

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

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Cigna Corporation (CI): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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