Cigna, HealthSpring Overcome Regulatory Hurdle to Deal

After the announcement last month that Cigna

would acquire HealthSpring

in a $3.8 billion deal, both companies announced on Monday that they had overcome regulatory hurdles to their union. The deal—still subject to shareholder approval that is expected by the first half of 2012—furthers a string of deals pursued by insurers seeking to expand their Medicare Advantage Business.

Medicare Advantage is a fast growing category of privately run health insurance plans that offer expended coverage on top of what the government traditionally pays for. Currently comprising approximately 25 percent of the Medicare market, Wedbush Securities analyst Sarah James believes private Medicare Advantage plans are expected to become roughly half of all Medicare as baby boomers retire in increasing numbers.

Currently the nation's fourth largest health insurer, Cigna expects that the deal will boost its Medicare Advantage base by approximately 655 percent from its current 45,000 customers. As the deal is expected to gain shareholder's approval by the second half of 2012, the company expects an effect in its earnings per share in the succeeding year.

Cigna's CEO David Cordani described the deal as a “great fit with Cigna's growth plans to expand into the seniors and Medicare segment through a premier business and trusted brand name.”

Cigna's $55 per share offer represented a 37 percent premium over HS shares at the close of trading on October 21, the day before the merger was announced. HS immediately shot up to breach the $53 level upon the announcement. Since then, the stock has tacked on a modest $2 increase.

Cigna is financing the $3.8 billion deal with a combination of share sales, short and long-term debt as well as cash. Last week, the company announced a sale of 15.2 million shares for $42.75 per share, a portion of which was expected to go toward the deal. In addition, the company has issued bonds to take advantage of record-low interest rates.

Several leading health insurers have pursued deals that added to their Medicare advantage customer base. UnitedHealth Group made moves earlier in the year, pursuing XL Health. It is rumored that Cigna outbid UNH in the deal for HealthSpring, along with possibly Humana, Aetna and WellPoint, according to Citigroup's stock analyst Carl McDonald.

In a research report, McDonald believes there was at least one competitor that outbid Cigna by $1 per share, but that regulatory considerations that favored CIGNA swayed negotiations to make it the eventual acquirer. In light of this development, the CI-HS deal became focus of a shareholder lawsuit claiming dereliction of the obligation to maximize shareholder value.

These considerations were counteracted by significant divestitures that would have been required, had the mergers with any of the alternatives in the running been materialized. Yesterday's announcement appears to have vindicated such diligence.