Friday, July 24, 2015

Investors Not Buying Anthem-Cigna Deal

Earlier this week, I wrote that merger arbitrage spreads indicated investors are not convinced the spate of recently announced takeovers among health insurers will close. Today’s news that Anthem (NYSE:ANTM) and Cigna (NYSE:CI) have agreed to takeover terms does not change that story.

Anthem’s original (hostile) bid was for $184 per share. Today’s is a minor bump, of $188 per share. The big difference is the mix of cash versus Anthem stock. The original bid was $126.22 in cash, versus only $103.40 today. Today’s bid includes 0.515 shares of Anthem stock, significantly higher than the previous bid.

The joint announcement claimed the new bid was at a premium of 38.4 percent of Cigna’s unaffected price. However, prices of both shares used for valuation in the announcement were May 28 closing prices.

As of today’s close, the share prices indicate investors went home for the weekend with a 22 percent return on shorting the spread between the two stocks (including a net short dividend of $1.25 per Cigna share), anticipating the deal closing in one year. This spread is significantly higher than I reported in my earlier article, when it was 17 percent.

For non-investors: The merger arb spread refers to buying shares of Cigna and shorting shares of Anthem, covering the short sale by delivering Cigna shares to receive Anthem shares when the deal closes. A rate of return of 22 percent indicates investors believe there is a lot of risk that this deal will not close.

As previously indicated, I believe the biggest risk is that politicians and regulators do not want to take responsibility for the consolidation of health insurers in to an oligopoly, in the wake of Obamacare.

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