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Investor Confidence in Cigna and Anthem Rises as Health Care Mergers Dealt Blows

- By Holly LaFon

As a judge struck down a mega merger between health care giants Aetna (AET) and Humana (HUM) on Tuesday, investor confidence seemed to grow for two other companies seeking to unite in a similar deal, Cigna (CI) and Anthem (ANTM).

On Wednesday, shares of Anthem Inc. climbed 2.32%, extending their year-to-date climb to 6.92%, and Cigna rose 1.39%, closing the year to date up 11.38%. Both companies continued their ascent as they faced potential obstacles to their $54 billion merger and an unfavorable environment for the rapid consolidation of the health care industry this week.


U.S. District Judge John D. Bates blocked the $37 billion merger between insurers Aetna and Humana on Monday, saying it would narrow competition, violating antitrust laws enforced by the Obama administration.

"Competition spurs health insurers to offer higher quality and more affordable health insurance to seniors who choose Medicare Advantage plans and to low-income families and individuals who purchase insurance from public exchanges," Deputy Assistant Attorney General Brent Snyder, current Justice Department head, said in a statement. "This merger would have stifled competition and led to higher prices and lower quality health insurance."

Shares of all four companies had slumped on Tuesday following the ruling. The decision placed the probability of a Cigna-Anthem merger further in question as it faces a similar legal battle. Last Thursday, Anthem revealed that it extended its termination date for the merger to April 30, almost a year after its originally planned closing time frame of the first half of 2016. Anthem said it needed the additional time to complete the merger "regardless of the outcome of the District Court's proceeding." The announcement came a day before the New York Post reported that the judge was set to block the deal.

The Department of Justice under the Obama administration also sued Anthem to prevent a merger it believed would reduce competition among health care insurers.

Both Anthem and Cigna have said that their plan does not violate antitrust regulations regarding competition, though.

"We are confident in our ability to obtain regulatory approval, as our operations are highly complementary and will provide greater choice, increase access to care, and deliver better affordability to current and prospective customers and clients," a merger website reads.

"We do not want to speculate on the specifics of the regulatory process, but the DOJ is aware of both transactions and has publicly suggested that it will consider the impact of both transactions at the same time," they also said.

All four companies still see possibilities for positive outcomes, though. As Humana and Aetna are said to likely appeal the decision and Aetna and Cigna postpone theirs, both delay their decisions until further into a Trump administration that some see as being less friendly toward antitrust pressure.

Should the deals fall through, both Aetna and Cigna have reported upbeat earnings guidance. On Jan. 12, Anthem announced adjusted earnings guidance of more than $10.80 per share, an increase from $10.16 per share for 2015. Cigna forecast revenue growth in the mid-single-digit range for 2016, though it lowered its consolidated adjusted income from operations of $7.80 to $8.05 per share, from $8.85 to $9.25 it expected at the end of 2015. It has a 15.6% five-year EBITDA growth rate.

Combined, Anthem and Cigna would create a global benefits company with more than $115 billion in annual revenues.

Both stocks also rose along with the gains in the broader market, as the S&P 500 continued its upward march. The index closed Wednesday up 0.85% from the previous day, for a year-to-date increase of 2.46%.

As of the time of writing, Guru ownership of the companies was available only through the third quarter. Portfolios will be released over the next two weeks.

This article first appeared on GuruFocus.