JPMorgan Downgrades Humana Following Deal Reports

Three credible sources, namely MLEX, Reuters and Bloomberg, have indicated that DOJ may seek to block the acquisition of Humana Inc HUM by Aetna Inc AET. In the event the pending acquisition gets blocked by the DOJ, there would be material downside to Humana’s shares, JPMorgan’s Gary P Taylor said in a report.

The probability of deal approval has declined much below a 50/50 chance. If the deal does not come through, Humana’s shares could initially decline to as low as $115-125, analyst Gary Taylor noted. He downgraded the rating on the company from Overweight to Neutral, while reducing the price target from $196 to $150.

What’s Next?

In case the acquisition by Aetna does go through, Humana’s shares would appreciate even higher than earlier, since the probability of the deal happening has declined.

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If the DOJ blocks the deal, Aetna may choose to litigate. Taylor pointed out, however, that companies “rarely win such challenges so the market will likely ascribe a low probability.”

Aetna owes Humana a pretax termination fee of $1b on a regulatory block. While there is some speculation of both Anthem Inc ANTM and CIGNA Corporation CI still being interested in acquiring Humana, the analyst mentioned that both these companies have “materially less MA overlap with HUM than AET (580k lives),” and that investors would be skeptical of a deal materializing.