Anthem ends battle for Cigna after court ruling

Wilmington, Delaware

ANTHEM Inc's nearly two-year effort to buy rival insurer Cigna Corp is officially dead.

Anthem said on Friday it won't appeal against a Delaware judge's ruling late on Thursday that Cigna can walk away from the US$48 billion health insurance merger. That leaves the companies to fight over who's to blame for the deal's collapse.

"The only surprise here is that it took so long to reach an ending that the market had long anticipated," said Michael Newshel, an analyst with Evercore ISI.

The judge's decision means Anthem could be on the hook for a US$1.85 billion break-up fee to Cigna, which said on Friday it will seek "prompt payment".

The insurer has argued that Anthem was too stubborn to see that the concerns about competition were insurmountable, and also wants US$13 billion in damages. Meanwhile Anthem, which has countersued, said that it will seek damages, too, and that its former merger partner isn't entitled to a termination fee.

"The reality is both parties probably have some risk and they'll bargain for something between zero and US$1.85 billion," said Matt Cantor, an antitrust lawyer at Constantine Cannon.

In his ruling, Delaware Chancery Judge Travis Laster said Anthem didn't deserve a 60-day extension of an earlier order barring Cigna's exit because it was "incredibly unlikely" that the company could close the deal. However, the judge said there was significant evidence Cigna may have violated the merger agreement by dragging its feet on antitrust concerns, which could entitle Anthem to "potentially massive damages".

"Cigna's repeated wilful breaches of the merger agreement and its successful sabotage of the transaction has caused Anthem to suffer massive damages," Anthem said on Friday.

In its own statement a few hours later, Bloomfield, Connecticut-based Cigna used similar language, stating that "it believes that Anthem wilfully breached those obligations and as a result the transaction did not receive the requisite regulatory approvals".

The takeover had been blocked this year by a federal judge on antitrust grounds. Anthem has asked the US Supreme Court to overturn a ruling finding the deal flawed, though the court is unlikely to weigh in now that Cigna has been allowed to walk.

The demise frees both Anthem and Cigna to acquire other firms, and it lets Cigna once again determine its own fate.

"That's the next big question," said Ana Gupte, an analyst at Leerink Partners. "I think they'll end up being more acquisitive."

Cigna chief executive officer David Cordani has estimated that Cigna would have US$7 billion to US$14 billion of deployable capital by the middle of this year. The high end of that range includes extra debt the company could take on if it decided to make acquisitions, Mr Cordani has said. The company said on Friday it would repurchase at least US$1.6 billion in stock by the end of the year.

Anthem, based in Indianapolis, has also said it would pursue deals and buybacks as its "Plan B" if the Cigna transaction didn't go through.

Anthem CEO Joseph Swedish has said he might attempt to use deals to expand in Medicare Advantage, the lucrative business of selling private health plans for the elderly.

There are a plethora of other partners for either company. A takeover of Humana Inc by Aetna Inc was also blocked this year on antitrust grounds. Humana, which has a market value of about US$33 billion, specialises in Medicare Advantage.

Molina Healthcare Inc, which specialises in the Medicaid health programme for low-income individuals, could also be in play, said Les Funtleyder, a healthcare investor at E Squared Asset Management. The company's board ousted the CEO and CFO brothers who long led the firm their father founded.

At the same time, insurers may pause as they wait and see what lawmakers in Washington do with the Affordable Care Act. Republicans are working to gut the law and rewrite insurance rules.

"Everybody will catch their breath, and maybe we'll revisit some M&A in '18 or '19 as the rules of the road start to become more clear," Mr Funtleyder said. "I would be surprised if anybody did anything there for a while." BLOOMBERG