The health insurance industry has been buzzing the past few weeks with speculation that a big merger is close at hand. Aetna, Anthem, Cigna Corp. and Humana have all been at its epicenter.
But right now, the discussion looks more like a wild goose chase. One analyst tried to douse the flames Thursday, telling investors in a research note that a seismic deal by Anthem, in particular, seems a tad unfounded.
Anthem Chief Financial Officer Wayne DeVeydt made headlines this week at the UBS Global Healthcare Conference in New York when he told the audience that Anthem has enough cash to conduct a “transformative” acquisition. A May 12 research note from Leerink Partners originally stoked the chatter by talking about a different insurer. The investment bank met with Aetna executives and concluded a merger with either Cigna or Humana was “imminent.”
Anthem's most recent statement was really no different than what it said in January, when Anthem CEO Joseph Swedish told investors at the J.P. Morgan Healthcare Conference in San Francisco that his company would be ready to explore a larger transaction “if the opportunity presents itself.” Aetna executives have similarly been upfront about their desire to grow through acquisitions.
The thought process has been that if Anthem were to acquire any other large insurer, Humana would make the most sense. Anthem's Medicare Advantage business needs some work, and Humana is one of the largest, highest-rated Medicare Advantage insurers in the country.
Chris Rigg, an equity analyst at Susquehanna Financial Group, met with Anthem executives recently and said the management team “made no mention or even slight indication that a large-scale transaction is on the horizon.” The company has the cash and the size, but Rigg posited it's possible Anthem may pursue more strategic, regional moves similar to its purchase of managed-care company Simply Healthcare this year.
“We think predicting a transaction on this order of magnitude would be highly speculative and, in some ways, irresponsible,” Rigg wrote.
If Anthem were to purchase Humana, it would come at a hefty price. One way to look at the value of healthcare transactions is by measuring a company's profitability through its earnings before interest, taxes, depreciation and amortization, or EBITDA. As of this month, the average healthcare deal has an EBITDA multiple of about 12.9x, according to financial firm Duff & Phelps. That means a company is willing to pay almost 13 times another company's 12-month profits to acquire it.
Humana's 12-month EBITDA is hovering around $2.7 billion. For Anthem or any other insurer to acquire Humana, it would have to shell out $35 billion and perhaps more. UnitedHealth Group just paid about 16.7x EBITDA for pharmacy benefits manager Catamaran Corp. Using that multiple would put Humana's price tag around $45 billion—a substantial sum for any company to absorb.
Humana's lofty value is one reason why Brian Wright, an analyst at financial services firm Sterne Agee, previously thought a Humana deal would be difficult to pull off. “I think it gets harder and harder for potential acquirers to buy Humana,” Wright told Modern Healthcare in January. “The financials just don't work out” so that a deal can immediately benefit earnings.
A deal for Cigna would likely cost more. Cigna's 12-month EBITDA is almost $3.9 billion, meaning that any suitor would likely pay at least $50 billion for it. A so-called “merger of equals” is another possibility among the big five insurers if a pure acquisition couldn't work.
Health insurers have clearly shown an appetite for purchasing competitors this year, but how widespread those efforts will be is tough to parse from a few fleeting quotes.