Humana's stock descent began in earnest last week after antitrust trade publication MLex cited sources who said the Justice Department was skeptical about the Aetna-Humana deal and potentially was ready to sue to block it. Aetna executives were supposed to meet last Friday with top federal officials who were reviewing the transaction, including Bill Baer, according to MLex and Bloomberg.
Humana was trading higher than $190 per share as recently as June 21. But Humana investors sold off the stock in droves last week after the Justice Department concerns were aired, falling 12% from $179.98 July 6 to $158.15 July 8. Humana was recovering Monday before dropping sharply in the afternoon amid renewed worries the feds want to block the deal.
“If Aetna-Humana doesn't happen…it's not gonna be that pretty,” said Steven Halper, an analyst at investment bank FBR Capital Markets & Co.
That's because Humana, one of the largest Medicare Advantage insurers in the country, has struggled with its core business and has been “consistently inconsistent” over the past several quarters, Halper said. Observers widely viewed Humana as the most likely takeover target in the run-up to the health insurance merger frenzy last year.
However, most Wall Street analysts still give a high probability of the Aetna-Humana deal closing despite the reports coming out of Washington. Halper said the meeting between the Justice Department and Aetna was routine, and if the feds were gung-ho about stopping the deal, information would not have been leaked.
“This could just be part of the negotiating dynamics that are going on,” Halper said, adding that the Justice Department could be pressuring Aetna and Humana to improve a possible settlement. Aetna, which has issued billions of dollars in new debt to fund the transaction, almost certainly will have to divest Medicare Advantage assets to get approval and allegedly is ready to sell off a chunk of that business.
Aetna's key argument in acquiring Humana is that traditional Medicare and Medicare Advantage are distinct, separate markets that compete with each other. Some states such as Florida have agreed to that interpretation, but Missouri has not. The Justice Department has not weighed in on that argument.
Aetna and Humana officials did not respond to requests for comment.
Halper and others believe the other major pending health insurance merger, involving Anthem and Cigna Corp., has a much greater likelihood of getting nixed. Many people are worried that deal will create too much consolidation among insurers who help large national companies administer health benefits to employees.
Last month, seven Democratic senators, including Elizabeth Warren of Massachusetts and Richard Blumenthal of Connecticut, wrote a letter urging the Justice Department to step in and halt both insurance mergers.
Even though Humana had a down day, the Dow Jones Industrial Average closed Monday up 0.44%, while the S&P 500 ended the day ahead 0.34% and hit a high watermark for the year.