Humana is seeking a deal for a sale following Thursday’s Supreme Court ruling affirming the Affordable Care Act in the King v. Burwell decision. The New York Times and other sources familiar with the company say the favorable decision means subsidies allow for more potential customers for Humana, making them more profitable and ripe for acquisition. There have been rumors of a sale for weeks, including Aetna and Cigna as potential suitors; now the Times reports that a deal could happen as early as this week.
Shares in Humana closed up 20% on Friday, putting its market capitalization at $27 billion.
Our Take: Humana is attractive to investors for several reasons. In general, industry consolidation is expected within every major healthcare vertical as the ACA ratchets up the competition and is forcing shrinking margins across the board. In a reduced-profits world, bigger is better. Humana also earns the bulk of its business through its Medicare Advantage plans, which has been growing rapidly as baby boomers age. The Wall Street Journal previously reported that despite growth in membership in the first quarter, earnings fell below expectations, largely because of an unexplained increase in hospital expenses; other major insurers reported no such increase in utilization.
Don’t expect the merger mania to end any time soon. Last week Cigna reportedly rejected a bid from Anthem—not for the first time—for $184 per share, which the company called “inadequate and not in the best interests of Cigna’s shareholders.” UnitedHealth reportedly approached Aetna about a merger two weeks ago.