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What’s on the Line with Aetna’s Proposed Acquisition of Humana?

Brent Nyitray, CFA, MBA

Humana and Aetna Merge to Challenge UnitedHealthcare

(Continued from Prior Part)

Basics of the transaction

As we saw in the first part of this series, Aetna (AET) is buying Humana (HUM) in a cash and stock merger worth about $37 billion. Humana shareholders will receive $125 cash plus 0.8375 shares of Aetna for each share of Humana. The companies will pay their respective dividends while the transaction, which is expected to close in the second half of 2016, is pending.

Management comments on the transaction

Shawn M. Guertin, Aetna’s executive vice president and CFO, said, “The complementary nature of our two companies provides us with a significant synergy opportunity, furthering Aetna’s efforts to increase its operating efficiency. We expect synergies from the transaction to be $1.25 billion annually in 2018. These cost efficiencies will support our efforts to drive costs out of the system and offer more affordable products.”

The comments regarding affordability are critical, because the objection from the regulators will be that a small number of insurers could lead to higher prices. The companies will have to convince regulators that their merger will give consumers better service at lower prices.

Specific conditions 

The following conditions need to be satisfied in order for the deal to close:

  • Humana shareholder vote
  • Aetna shareholder vote
  • SEC (U.S. Securities and Exchange Commission) approval of joint proxy statement
  • Hart-Scott-Rodino Antitrust Improvements Act filing

Non-solicitation agreement and breakup fee

Both companies have non-solicitation covenants with a fiduciary out. This means they aren’t allowed to discuss merging with another company unless they receive a bona fide written proposal and the Board of Directors believes it could lead to a superior transaction.

If Humana accepts another bid, they will owe Aetna $1.3 billion. If Aetna gets a bid and dumps Humana, they will owe Humana $1.7 billion. If the regulators demand too much in the way of divestitures, Aetna can walk away from the transaction and must pay Humana $1 billion.

Other merger arbitrage resources

Other important merger spreads include the Hospira–Pfizer deal. The Hospira (HSP) and Pfizer (PFE) merger is set to close in 2H15. For a primer on risk arbitrage investing, read Merger arbitrage must-knows: A key guide for investors.

Investors interested in trading in the healthcare sector should look at the Health Care Select Sector SPDR Fund (XLV).

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