VHT - Catalyst Watch: Cigna Humana Deal Would Face Regulatory Hurdles

2023-12-03 09:00:00 ET

Summary

• Economists expect a rise of about 175,000 in non-farm payrolls.
• Broadcom and Lululemon are set to report earnings, with analysis focused on Broadcom's relationship with Google and Lululemon's success and diversification.
• Talks of a potential Cigna-Humana deal are underway, but regulatory hurdles and a lengthy approval process may delay the completion of the blockbuster deal.

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Catalyst watch for the week of December 3. Seeking Alpha Senior Executive Editor Kim Khan on the upcoming jobs report and how the numbers play into Fed rate cuts. (00:21) Julie Morgan shares the latest analysis on two companies set to report earnings, Broadcom ( AVGO ) and Lululemon (LULU). (01:52) Finally, Kim gives analysis on a potential Cigna, Humana deal. (03:05) He also shares insight on the M&A landscape for 2024. (05:06)

Julie Morgan: Kim, this week we have jobs again, right?

Kim Khan: Yeah, it just keeps rolling around and remains ever important, especially as the markets, kind of gauge what happens with the Fed. There's a new narrative on the Fed. Of course, it's not tightening, it's loosening. But for the jobs numbers, the economists are looking for a rise about 175,000 on non-farm payrolls. That's a little pottered than we saw last month, but still consistent with a job market that is loosening and which is what the Fed wants to see.

JM: So, how do these numbers play into Fed rate cuts? I mean, I look at it and I'm thinking it's never going to happen, but you know what, I think I'm just a pessimist.

KK: Yeah. Well, we’re certainly on the pessimistic side of that trade, Julie, because that has been the narrative all week is, you know, forget about tightening, when is the Fed going to cut? And people are saying now, as soon as March, we've got 50-50 chance and the Fed funds futures market pricing that in. A lot of that's been on the back of dovish comments from Fed speakers, especially Christopher Waller, who is a hawkish voting member of the FOMC. He's saying that, you know, tightening has kind of done its job.

So, people are pricing in much earlier rate cuts than before and more rate cuts for 2024 than they had been previously as you keep seeing longer-term yields go down. And Bill Ackman was out saying, he expects that the federal will have to do some loosening in the first quarter of next year or it's going to get out of hand with real interest rates.

JM: All right. So today in earnings, we're talking about what's on the earnings calendar for this week. We're talking about Broadcom and Lululemon. Let's first of all talk about Broadcom. Broadcom is set to report earnings on December 7th after the market closes. Stephen Simpson wrote one of the latest articles on Broadcom on Seeking Alpha. The article is entitled Broadcom Leveraging AI To Further Soften its Cyclical Semiconductor Reset. That's a mouthful. When you read the article, look out for what Simpson has to say about Broadcom's relationship with Google, whether he believes Broadcom can deliver a soft landing and what he says you should do if the AI hype train slows.

Next, we have Lululemon. Graham Grieder wrote the article Lululemon: Set To Outperform Yet Again In 2024. He tells his nearly 6,000 followers on Seeking Alpha what he believes is the real secret to Lululemon’s success. Also in the article look for what he says about Lulu diversifying and how the stock holds up to Gap, Nike, and Under Armour. Lululemon is also set to report earnings on December 7th.

Kim, now let's talk about a report that Cigna and Humana are in talks to become one and the deal could be finalized by the end of the year, but I'm looking at the calendar and Kim, it's basically, I mean, it is, it's December.

KK: Yeah, I mean, it would be a blockbuster deal and strategically, kind of makes sense with Cigna's pharmacy business combining with Humana's Medicare Advantage strong business, but seems like a month would be a very short time to get this blockbuster deal completed, especially with regulatory hurdles it will have to overcome. Because if you look back, both of these companies have been part of mega deals that have been scrapped on antitrust grounds. Anthem tried to purchase Cigna in a $48 billion deal and Aetna tried to buy Humana for $37 billion. This was around 2017, and so obviously they want to go in. They'll probably have a plan to divest some of their businesses to make it more appealing to regulators, but it seems like a tough ask.

The FTC has been very tough, even though it has faced some big losses, most notably Microsoft and Activision in trying to scupper some deals. Then you've got other countries that are going to weigh in on UK and Eurozone specifically there and regulatory bodies also take a while to okay big deals. So, it seems unlikely that this doesn't stretch into 2024.

JM: TD Cowen , it says that it would create an 18-month to 24-month overhang on the stock. So, they're actually expecting this to last a whole lot longer.

KK: Yeah. And I mean, if you look at the stock reaction , both stocks are down significantly after this report and that's the kind of shareholder reaction that is basically what I kind of see is, oh no, here we go again. And so, now we're going to be dragged on through months of trying to get the deal approved by government regulators. And we're not going to be focusing on execution for the company or return for shareholders or the other things that we could be doing as a company. It's going to be interesting to see how these blockbuster deals play out next year, because we've had some successes and misses this year, but overall this year, the pace of global M&A has been down pretty sharply. And a lot of the deals that you may have seen, especially smaller deals, didn't happen.

Next year is going to be quite different, because, you know, the median Wall Street bank expectation is for the S&P to be up around 5% from where it is now at the end of 2024, that's a below average return. So, companies are going to be looking for other ways to boost share price or unlock value. And M&A is going to be one of those things. Gartner is out with a report, what they said would be the biggest trends for M&A. And going back to what we were talking to, one of them they said was increased regulatory scrutiny is going to hinder large M&A activity.

So again, deals like Cigna and Humana, maybe not the kind of deals we're seeing mostly next year. Instead, we'll be seeing what they see as much smaller deals saying that regulatory scrutiny can have a chilling effect on large M&A transactions, but can create a competitive opportunity for enterprises best positioned to complete a higher volume of smaller deals. You know, what kind of deals? They also go into that and you'll not be surprised that AI is going to be the big one. They're saying that the acquisition of AI businesses needs to be at the forefront in all business strategies in 2024. So, no matter what sector you're in, you're probably going to see some deals of companies trying to acquire AI capabilities.

JM: You know what, I remember at the beginning of this year, you and I were talking about AI and I was kind of hoping that, you know, it would kind of go away, but it didn't and it's not, and it's here to stay.

KK: That's not going to go away. It's going to take over. We know that.

JM: Oh my goodness. Let's really not go there. Kim, is there anything else you want to add?

KK: No, that's it for this week.

JM: All right, we'll see you next time.

KK: Thanks Julie.

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