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July 08, 2015 at 08:16 AM
(Bloomberg) — Investors aren’t giving much love to the latest dealmakers in health insurance.
After announcing a $37 billion acquisition of Humana Inc., Aetna Inc. plunged 6.4 percent on Monday, its biggest one-day drop in three years. Meanwhile, Centene Corp. had its worst two- day period since 2012 after saying on July 2 that it would buy Health Net Inc. for $6.8 billion, including debt.
Both Aetna and Centene were considered targets in their own right, which is one reason for the stock slides. Now that the companies are buyers, investors are sucking the takeover premiums out of their shares.
“The M&A chatter, while it’s really ramped in the last month or so, has been ongoing for the last year-plus,” said Chris Rigg, an analyst at Susquehanna International Group. “Now these deals are coming to fruition and some people might be asking, ‘What’s next?’”
In an interview on Bloomberg Television Tuesday, Aetna Chief Executive Officer Mark Bertolini said traders who bet on deals, known as arbs, are to blame for the recent share-price plunge.
“It’s the arbs that got in the deal looking for opportunity, and I’m not quite sure they know how to do this trade,” Bertolini said. “We’re going to have to let the kind of shareholders who value this deal find their way through it.”
The industry may also be headed for a rough patch. Humana on Monday lowered its 2015 earnings forecast because of higher- than-expected claims for its Medicare Advantage business. That raises the risk that Aetna overpaid, though the company says it became aware of Humana’s performance in the due diligence process. Aetna agreed to a 23 percent premium to Humana’s July 2 closing price, which already included gains from takeover speculation.
Diversification
Aetna dropped less than 1 percent to $114.26 at 10:11 a.m. New York time on Wednesday, while Centene rose less than 1 percent to $70.64.
For Centene, the purchase of Health Net will add to its offerings in insurance sold through the government’s Medicare and Medicaid programs. Yet the new, bigger Centene likely won’t be able to grow as quickly as the old Centene did, said Jennifer Lynch of Bank of Montreal
“It would have taken a very long time and been a complex process for Centene to have gained a material footprint in California Medicaid, and now they get that with this transaction,” Lynch said when the deal was announced. “But I also think the profile of the businesses that they’re acquiring don’t have quite as attractive of a growth rate.”
