View: Anthem-Cigna's market doubters have a point

(Bloomberg) — Two major insurance mergers — Anthem-Cigna and Aetna-Humana — are set to reshape the whole sector. One seems to be sailing relatively smoothly toward completion. The other looks to be lurching toward “who knows?”

See also: Health insurer deals face market review that felled past tie-ups

Investors have never been sold on either deal as a sure thing, but the Anthem-Cigna tie-up is looking increasingly endangered. Anthem’s offer is now 36 percent above Cigna’s price, the biggest such gap since the deal was announced. Aetna’s offer is 28 percent above Humana’s price — also hardly a vote of confidence. But though Anthem CEO Joe Swedish said at a conference Tuesday that the deal is progressing well, there is more reason to doubt the company’s tie-up with Cigna.

As if the high regulatory hurdles to such mergers weren’t enough, lawyers at Anthem (NYSE:ANTM) and Cigna (NYSE:CI) are reportedly sending each other delightfully passive-aggressive letters over a series of deal-related disputes, according to the Wall Street Journal.

The lawyers’ letters reveal a long slate of difficulties. Cigna seems nervous about Anthem’s legal fight with pharmacy benefit manager Express Scripts (Nasdaq:ESRX) over drug pricing. Anthem is reportedly accusing Cigna of holding back information and being slow to approve documents related to the deal. The letters suggest Anthem and Cigna aren’t nearly as far along in the regulatory review process as Aetna (NYSE:AET) and Humana (NYSE:HUM). And there have apparently been disputes over the role Cigna CEO David Cordani would have at the combined company. He’s currently slated to take over as COO. Should the deal fall apart, Cigna would walk away with a meaty $1.82 billion termination fee and Cordani would keep the top job.

This does not paint a picture of two companies on the same page, and their issues could delay antitrust approval. This may be a series of resolvable hiccups. Or it may represent foot-dragging from companies with deal remorse.

The implied levels of doubt here are comparable to some pretty shaky mergers. Cigna is trading at a similar discount to its deal price as Alere is to Abbott’s. That deal is on the rocks after Abbott said it had “serious concerns” about the accuracy of Alere’s financial information and tried to pull out. Not exactly good M&A company for Anthem-Cigna.

The risk of regulatory rejection over antitrust concerns is very real for both insurance deals. But it may be a bit more real for Anthem and Cigna. Those companies have more business overlap on the commercial side of their business than do Aetna and Humana. And divestitures may not be a fix, given the size of the units, according to Bloomberg Intelligence.

Anthem is already the biggest commercial insurer; acquiring Cigna would make it the biggest by a large margin. In contrast, Aetna’s deal would make it the new leader in Medicare Advantage enrollment, but only just barely, and its relative position in other markets would stay exactly the same. Regulators have started to think more about how mergers affect the entire U.S. market, a shift from a previous focus on how deals affect local competition. That is not good news for Anthem’s merger prospects.

Last year, none of the big five firms had a dominant lead in any single area.