Anthem Agrees to Buy Cigna for $48 Billion--6th Update

By Dana Mattioli, Liz Hoffman and Chelsey Dulaney 

Anthem Inc. agreed to buy Cigna Corp. for $48.4 billion in a transaction that, along with a previously proposed combination of rivals, could reshape the U.S. health-insurance industry.

The deal, which follows months of speculation and at-times contentious talks, combines the second- and fifth-largest health insurers by revenue and merges two companies with a huge footprint in commercial insurance, the type of coverage provided to employers and consumers.

The merged company is projected to have around $115 billion in annual revenue and cover about 53.2 million people. The deal and its price was first reported by The Wall Street Journal earlier this week.

The tie-up of Anthem and Cigna follows by about three weeks Aetna Inc.'s agreement to buy Humana Inc. for $34 billion and further accelerates the rapid-fire reconfiguration at the top of the U.S. managed-care industry. The biggest companies are seeking more cost efficiency and scale as the health-care landscape changes because of the Affordable Care Act and other factors.

Of the five largest health insurers, only UnitedHealth Group Inc., the largest by revenue, is sitting out the merger wave, at least so far.

Under the deal's terms, Indianapolis-based Anthem agreed to pay $188 a share for Cigna, of Bloomfield, Conn., based on Anthem's closing price on May 28. Cigna shareholders will receive $103.40 in cash and 0.5152 Anthem shares for each share held. Including debt, the deal is valued at $54.2 billion.

The deal requires government approval, and legal experts have said regulators are likely take a close look at the recent deals in the health-insurance industry. The companies said Friday that they expect the deal to close in the second half of 2016.

In a sign that investors have doubts about the deal's prospects, Cigna shares are trading well below the offer price. In premarket trading, Cigna shares rose 0.4% to $154.91, while Anthem shares added 0.9% to $156.55.

Anthem Chief Executive Joseph Swedish will remain CEO and add the chairman title, while Cigna CEO David Cordani will become president and operations chief. The role Mr. Cordani would hold in the combined company had been a sticking point in deal talks.

Anthem estimates that the deal will grow its per-share earnings by 10% in the first year after closing, with accretion more than doubling by the second year.

Anthem shareholders will own 67% of the combined company, while Cigna shareholders will hold 33%. Based on closing prices Thursday, Cigna had a market value of about $39.7 billion, while Anthem was at $41.1 billion.

The agreement between Anthem and Cigna caps off a monthslong, sometimes contentious back-and-forth between the companies, with Anthem at one point going public with its offer.

The two health insurers began holding talks about a combination last summer, but the talks broke down over issues such as who would run a combined company. A particular point of contention has been the role Mr. Cordani would play, including if and when he would run it. In June, Cigna rejected a $47.5 billion offer from Anthem, worth $184 a share, calling it "inadequate and not in the best interests of Cigna's shareholders."

Anthem, which is a Blue Cross and Blue Shield plan in 14 states, has a commanding presence, particularly in individual and small-employer plans, but also is a major player in serving large, multistate employers, which it does in partnership with other Blue-plan companies around the country.

Cigna is known for its focus on administering coverage for large employers, as well as a burgeoning overseas presence. With its 2012 acquisition of HealthSpring, Cigna also bolstered its Medicare business, which currently includes nearly 500,000 members. Anthem has 618,700 people enrolled in its Medicare Advantage plans, the private-insurer version of the federal program.

Anthem's Mr. Swedish has said the Cigna deal could generate nearly $2 billion in annual synergies, which generally refer to cost savings from eliminating overlap, adding that the combined company would have "the scale to drive greater efficiency and affordability for our customers."

The rapid reshuffling of the industry will likely present a challenge for the Obama administration, which views the health law as its signature domestic achievement. Antitrust regulators are expected to closely examine the implications of the two tandem deals and a third, smaller transaction announced earlier this month.

The Cigna deal, coming so soon after Aetna's announcement, could up the ante for regulators at both the state and federal levels. Analysts at Goldman Sachs Group Inc. looked at the coverage market for big, multistate employers and concluded that antitrust regulators might potentially consider it already on the borderline of concentrated, even before a merger of Cigna and Anthem.

But the analysts saw little or no risk of potential divestiture for an Anthem-Cigna combination in the Medicare Advantage, individual or small-group business.

Anthem also might face challenges because of its role as a licensee of the Blue Cross Blue Shield Association. To use the Blue brands, Anthem must adhere to the association's rules. According to Anthem's annual report filed with the Securities and Exchange Commission, the requirements include that two-thirds of a licensee's national net revenue from health plans and related services must stem from Blue-branded business.

Anthem's Mr. Swedish has said the company is "confident in our ability to obtain regulatory approvals," including from the Blue association, and that "no substantive antitrust or insurance regulatory issues are present that would prevent completion of the transaction."

Separately, Cigna on Friday raised its profit outlook for the year after reporting strong preliminary results for its second quarter, citing customer growth and medical-cost management.

For the year, Cigna said it is now expecting per-share income from operations of $8.30 a share to $8.60 a share, up from its already-raised forecast of $8.15 to $8.50 a share.

For the second quarter ended in June, Cigna said it expects its profit to be at least $574 million, or $2.21 a share, up from $573 million, or $2.12 a share, a year earlier. Excluding a per-share redemption charge of 25 cents, earnings would easily top the $2.25 a share in earnings analysts polled by Thomson Reuters had forecast.

Revenue is expected to grow 9% to $9.5 billion, while analysts had forecast $9.53 billion in revenue.

Anthem, meanwhile, also raised its 2015 per-share earnings estimate to more than $10, up from $9.90 For the second quarter, Anthem sees per-share earnings of $3.13, or $3.10 excluding certain items. Analysts were expecting per-share earnings of $2.70 in the second quarter and $10.08 for the year.

Anna Wilde Mathews contributed to this article.

Write to Dana Mattioli at [e-mail], Liz Hoffman at [e-mail] and Chelsey Dulaney at [e-mail]

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