Aetna Agrees to Acquire Humana for $37 Billion in Cash and Stock

JULY 3, 2015

The health insurer Aetna said on Friday that it had agreed to acquire its smaller rival Humana for $37 billion in cash and stock, signaling the start of what may become a flurry of consolidation in the sector.

The deal would bring together two of the biggest health insurers in the United States. The combined company would have estimated operating revenue of $115 billion this year and serve more than 33 million people.

The proposed merger occurs as the nation's largest for-profit health insurers seek ways to reduce costs and capitalize on growing opportunities in the government and individual markets. The companies say they will be able to operate more efficiently and negotiate more effectively with large health systems, which have also been consolidating.

The acquisition “will significantly advance our strategy of more effectively serving members in a rapidly changing health care industry,� Mark T. Bertolini, Aetna's chairman and chief executive, said in a news release. Mr. Bertolini would assume the same roles in the combined company. The company's board would be expanded to 16 members and include four Humana directors.

A push toward mergers received a continued incentive last week after the Supreme Court upheld the part of the Affordable Care Act that allows individuals to receive subsidies when they buy policies through, the online marketplace.

In an interview, Mr. Bertolini said the proposed merger would allow Aetna and Humana to adapt to an environment where consumers increasingly choose their coverage on exchanges like the one created under the law, or similar online marketplaces offered by employers. The industry, which has traditionally provided insurance to employers, is shifting more to selling policies directly to individuals.

“The public exchange is an example of where the system is going over all,� Bruce D. Broussard, president and chief executive of Humana, said in an interview.

The two executives said the companies offered strengths in different markets. The combined company would generate more than half of its revenues from the government Medicare and Medicaid markets. Humana has a large presence in the private Medicare market.

Under the deal, Humana shareholders would receive the equivalent of $230 a share, which is almost 29 percent higher than before news reports emerged that it was considering a sale.

News that a deal was close emerged late Thursday.

The transaction is subject to shareholder and regulatory approval and is expected to close in the second half of 2016.

Under the terms of the offer, Humana stockholders would receive $125 in cash and 0.8375 Aetna shares for each share they hold in Humana.

After the transaction, Aetna shareholders would own about 74 percent of the combined company, while Humana shareholders would own the remaining 26 percent.

Aetna previously received a preliminary takeover approach from UnitedHealth, the largest health insurer in the United States, and Anthem is pursuing a merger with Cigna.

On Thursday, Centene Corporation, a provider of managed-care health benefits, agreed to acquire Health Net in a cash-and-stock deal valued at $6.8 billion, including the assumption of debt. The deal would bulk up Centene's business in California and several Western states.

It is possible that regulators in the United States could block some mergers: Antitrust officials at the Justice Department and the Federal Trade Commission have shown an increasing willingness to do so if they believe the alliances could hurt consumers.

The Justice Department filed a lawsuit this week to block General Electric's plan to sell its home appliances division to Electrolux of Sweden for $3.3 billion.

Sysco also abandoned its proposed merger with US Foods this week after a federal judge issued a preliminary injunction in a Federal Trade Commission lawsuit to block the deal.

While there would seem to be significant overlap between Aetna and Humana in some states, like Florida, the two executives expressed confidence that regulators would not be concerned. Regulators will be looking at each geographic market to determine whether the combination would thwart competition.

Aetna said it expected to finance the cash portion of the Humana transaction through existing cash and about $16 billion in debt.

Once the deal closes, Aetna said, the insurer expects to maintain a significant corporate presence in Louisville, Ky., the home of Humana. The city would serve as the headquarters for the combined Medicare and Medicaid businesses and Humana's Tricare operations.

Founded in 1964, Humana provides health insurance to about 9.8 million people and their families and received about 73 percent of its premiums in 2014 from federal government programs, namely Medicare. The company posted revenue of $48.5 billion in 2014 and had about 57,000 employees.

Aetna said it expected to achieve $1.25 billion in annual cost savings by 2018 following the merger.

Aetna, based in Hartford, provides health insurance to about 23.7 million people and their families and posted revenue of $58 billion in 2014.

Citigroup and Lazard and the law firm Davis Polk & Wardwell advised Aetna, while Goldman Sachs and the law firm Fried, Frank, Harris, Shriver & Jacobson advised Humana.