ELV - Cigna-Humana M&A deal likely to take over 12 months to close: analysts

2023-11-30 08:47:29 ET

A potential M&A deal between Cigna ( NYSE: CI ) and Humana ( NYSE: HUM ) is likely to take more than 12 months to close, JPMorgan and Bank of America said Thursday after The Wall Street Journal reported that the two leading health insurers are gearing up for a blockbuster merger deal.

According to the Journal, Humana ( HUM ), a dominant player in the Medicare Advantage market, and Cigna ( CI ), which focuses on commercial health insurance and operates a large pharmacy benefits manager ( PBM ), are in talks to close the cash and stock deal before this year’s end.

However, JPMorgan analyst Lisa Gill sees regulatory headwinds and expects companies to take 12–24 months to close the transaction.

“We suspect regulators could try to argue against further PBM consolidation, although we do not believe a potential combination would change the competitive landscape as HUM’s PBM is small and primarily serves HUM members,” Gill wrote.

With Humana ( HUM ) discontinuing its commercial business and Cigna ( CI ) reportedly weighing a sale of its Medicare Advantage business, the analyst doesn’t see a significant overlap in competition.

However, “we still expect regulators will review and potentially challenge the deal,” Gill wrote, with Overweight ($358 price target) and Neutral ($575 price target) ratings on Cigna ( CI ) and Humana ( HUM ), respectively.

Citing significant strategic value, the analyst sees a higher multiple for a potential CI-HUM combination, despite initially dilutive effects. Gill sets her offer price for Humana ( HUM ) at $630, indicating a ~30% premium to yesterday’s close.

Meanwhile, Bank of America analyst Kevin Fischbeck said that the transaction would take more than 12 months to close.

While the deal can benefit Cigna ( CI ) given its low exposure to fast-growing government-backed insurance, Cigna ( CI ) “stock could be stuck in “deal purgatory” as it awaits government approval," the analyst added, maintaining his Buy rating and $370 target on the stock.

Even though competitive overlap is solvable, regulatory scrutiny over PBMs could come into focus, the analyst argued. Fischbeck doesn’t rule out other parties interested in Humana ( HUM ), while noting that “CI seems like a logical fit."

He points to past buyout interest shown by Walmart ( WMT ) and comments made by Elevance ( ELV ) management during the company's Q3 earnings call regarding potential M&A targets to improve its Medicare Advantage Star Ratings.

More on Cigna, Humana, etc.

• Humana And Cigna Topple On Rumors Of An Unlikely Union
• Cigna Delivering Growth At A Great Price
• Cigna Group (CI) Q3 2023 Earnings Call Transcript
• TD Cowen says Cigna, Humana merger would face lengthy regulatory delay
• Cigna, Humana in talks to combine in stock-and-cash deal - WSJ (update)

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