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Aetna Finally Agrees to Buy Humana: ETFs in Focus - ETF News And Commentary

The insurance corner of the health care sector has been the hottest lately as the five big managed health care insurers are in talks of consolidation. In the latest match-up merger game between Aetna (AET)-Humana (HUM) and Aetna-UnitedHealth (UNH), it seems that Humana has finally won following weeks of speculation (see: all the Healthcare ETFs here).

Aetna-Humana Deal in Focus

In the deal announced on the eve of the July Fourth weekend, Aetna will buy Humana for about $37 billion, or about $230 per share in a cash-and-stock deal. Per the terms, Aetna will pay $125 in cash to Humana shareholders, a 23% premium to its closing price as of June 2, and 0.8375 shares for each Humana shares. Aetna's shareholders will own about 74% in the combined company while Humana's shareholders will own the rest.

The combination, if successful, would be the largest ever in the managed health care insurance space, dwarfing the recently announced $28-billion takeover offer of Chubb Corp (CB) by ACE (ACE) and Anthem’s (ANTM) $16.6 billion purchase of WellPoint in 2004 (read: Insurance ETFs Jump as ACE Agrees to Buy Chubb).

The deal would push Aetna close to the second-largest insurer – Anthem – in terms of membership and would nearly triple its market share in the rapidly growing Medicare Advantage business. It will also bolster Aetna's presence in the state and federally funded Medicaid program and Tricare coverage for military personnel and their families. With this, the combined company is expected to generate revenues of $115 billion in 2015, with 56% coming from government-sponsored programs such as Medicare and Medicaid.

The acquisition, expected to be completed in the second half of next year, has already been approved by the board of directors of both companies and is seeking approvals from the shareholders and regulators. The transaction will be neutral to earnings in 2016 but accretive to earnings in mid single digits in 2017 and low double digits in 2018.

The proposed merger has put the spotlight on iShares U.S. Healthcare Providers ETF (IHF), which could be the best way for investors to tap the opportunity arising from the AET-HUM deal. The shares of HUM are up 3.4% in the pre-market trading today while Aetna dropped over 6% (read: Health Care Provider ETF in Focus on M&A Talks).  

IHF in Focus

This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 51 securities in its basket with Aetna occupying the third position accounting for 6.6% share and Humana taking up the seventh spot at 4.6%.

The fund has amassed over $1 billion in its asset base while volume is moderate at about 87,000 shares per day on average. It charges 43 bps in annual fees and expenses and has gained 20.4% so far this year. The product has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

Other ETF Options

While IHF is undoubtedly the solid pick in the health care space to take advantage of the planned merger, other choices are also available from the large-cap space. Among them, ValueShares U.S. Quantitative Value ETF (QVAL) provides a decent exposure to both Aetna and Humana with a combined share of 5.8%. The ETF invests in the cheapest highest quality value stocks, holding 41 stocks in its basket. It has amassed $55.5 million in its asset base while volume is paltry at around 16,000 shares. It charges 79 bps in annual fees (read: 3 Active ETFs for a Choppy Market).

Direxion iBillionaire Index ETF (IBLN) could also be the way to capitalize gains resulting from the Aetna-Humana deal. The fund provides an opportunity to invest like billionaires by tracking the iBillionaire Index. It has an equal-weighted portfolio of 31 large-cap stocks with Humana as one of its holdings. The product has AUM of $31.7 million and charges 65 bps in fees from investors. Volume is low, exchanging 12,000 shares in hand per day.

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AETNA INC-NEW (AET): Free Stock Analysis Report
 
HUMANA INC NEW (HUM): Free Stock Analysis Report
 
ANTHEM INC (ANTM): Free Stock Analysis Report
 
CHUBB CORP (CB): Free Stock Analysis Report
 
ACE LIMITED (ACE): Free Stock Analysis Report
 
ISHARS-US H C P (IHF): ETF Research Reports
 
VALUSH-US QUANT (QVAL): ETF Research Reports
 
DIRX-IBILLIONR (IBLN): ETF Research Reports
 
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