Humana and Aetna Merge to Challenge UnitedHealthcare
Regulatory approvals determine when the deal will close
For almost all mergers, the rate of return is driven by the time it takes to finalize the transaction. In the case of the Humana–Aetna merger, the main regulatory hurdle is antitrust.
Antitrust analysis
Before the merger of Humana (HUM) and Aetna (AET) can go ahead, each company will have to file under the Hart-Scott-Rodino Antitrust Improvements Act. Typically, to get a handle on antitrust, the first-step merger arbitrageurs will look at each company’s 10-K to see if the two parties are named as competitors. In a 10-K, a company provides an in-depth description of its business.
Humana and Aetna don’t name each other as competitors in their annual reports. Neither company named competitors. That said, the landscape is dominated by six major players:
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UnitedHealth (UNH)
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Humana
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Kaiser
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Aetna
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Anthem (ANTM)
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Cigna (CI)
Not all of these players are in every market, and the regulators will focus on individual markets. In many markets, we could see three competitors merging into two, or even two competitors merging into a monopoly.
The regulators will also take into account the views of healthcare providers, who are leery of this combination. It’s estimated that the combined company would have a 75% market share in Medicare Advantage in 180 counties. It would have 75% market share in a total of 68 counties, primarily in the South and Midwest. In most industries, that would be a non-starter, but insurance overall has some antitrust exemptions, and health insurance is highly regulated.
This combination is a certain “second request” deal, where the regulators will need more time than the initial 30-day waiting period before blessing the merger. The companies are guiding for the second half of 2016. For what it’s worth, Anthem is guiding for the end of 2016 if it gets a deal with Cigna.
Best efforts language
The companies agree to use reasonable best efforts to get the deal past the regulators. They agree to contest any sort of conditions placed on the merger. They also agree that neither side will offer any sort of remedy to the antitrust regulators without first consulting the other party.
The companies aren’t required to divest anything that would be a regulatory material adverse effect, but they don’t quantify in dollars what that would be. Given the regulatory breakup fee of $1 billion, it gives you some idea of what they are thinking.
Other approvals
Aetna and Humana will have to get the joint proxy statement approved by the SEC (U.S. Securities and Exchange Commission). If the SEC makes any comments, the companies will need to fix the language and file again. Once the SEC approves the proxy statement, a vote must be scheduled at least 30 days from the mailing date. If the deal doesn’t get a second request, the approval of the proxy statement will be the gating item.