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May 29, 2015 01:00 AM

Humana explores sale that would shake up health insurance industry

Bob Herman
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    AP
    Humana's corporate headquarters in Louisville, Ky.

    (Story updated at 4:00 p.m. Eastern.)

    Health insurer Humana, Louisville, Ky., is reportedly working with an investment bank to explore a sale.

    The Wall Street Journal reported Friday that Humana hired Goldman Sachs Group to see if any willing buyers would take over the company. Aetna and Cigna Corp. are among the interested parties, the Wall Street Journal said. Humana did not immediately respond to Modern Healthcare's request for comment. Goldman Sachs declined to comment.

    Humana Chief Financial Officer Brian Kane worked at Goldman Sachs for 17 years before joining the insurer last summer. While at Goldman, Kane advised large transactions among managed-care companies.

    Humana is one of the largest Medicare Advantage insurers in the country with more than 3 million covered seniors. The company has also been a rumored takeover target for more than a year.

    Vishnu Lekraj, a research analyst at Morningstar, said rumors of a Humana sale heated up during the last quarter. “It's not a shock,” Lekraj said in an interview Friday. “It makes sense someone would buy them.”

    However, a potential buyer will be taking on several risks. Humana was the only publicly traded insurer in the first quarter to witness higher medical costs and more inpatient admissions. Humana is also the target of a federal probe over its Medicare risk-adjustment practices. The U.S. Justice Department is looking into whether Humana overstated the risk scores of its Medicare members.

    Acquiring Humana would require a significant amount of money. Humana's earnings before interest, taxes, depreciation and amortization, or EBITDA, are about $2.7 billion. Using the latest industry multiples of EBITDA, a buyer would likely pay anywhere from $35 billion to $45 billion for Humana.

    “I think whoever buys (Humana) is going to be paying a hefty premium,” Lekraj said.

    Aetna and Cigna have both stated they want to increase their Medicare membership. Jeffrey Loo, an equity analyst at S&P Capital IQ, said he would include Anthem in the mix of suitors as well.

    Financial analysts agree UnitedHealth Group probably would not be an interested buyer because it already has a large Medicare Advantage base and is preoccupied with its $12.8 billion acquisition of Catamaran Corp.

    Health insurance stocks are up about 19% this year and have soared since the Affordable Care Act went into effect in March 2010. Equity, therefore, could be a major part of a deal.

    “That gives a potential acquirer some flexibility on how to fund a transaction,” Loo said. “They could use the stock as opposed to financing a deal with debt or cash.”

    Trading of Humana shares halted briefly Friday afternoon, and prices soared past $200 to record highs after trading resumed.

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