Merger speculation is sweeping through the insurance sector, which stock analysts say is ripe for consolidation.
Shares of Minnetonka's UnitedHealth Group jumped 2 percent Tuesday in reaction to a Wall Street Journal report that it's made an overture to competitor Aetna. That followed speculation in recent days about several other big health insurers.
The rationale for any deals is straightforward: Bigger insurers are seen as having more ability to meaningfully improve earnings amid growing pressures on managed care companies from regulators and hospitals.
"For the first half of 2015, the story with the (managed-care) stocks has been about rising anticipation of large-scale M & A," or mergers and acquisitions, analysts with Deutsche Bank Securities wrote in a note to investors Tuesday. It noted that the "fusillade of media headlines suggest that all of the industry leaders are fully mobilizing their financial arsenals for the developing consolidation showdown."
Deutsche Bank estimated a UnitedÂHealth acquisition of Aetna could come with a $64 billion price tag. UnitedHealth declined to comment Tuesday.
Analysts at Oppenheimer & Co., in an investor note headlined "Consolidation Reports Continue to Swirl," said earlier this week that the latest speculation follows news in Bloomberg and elsewhere that insurer Anthem may be considering bids to buy smaller competitors Cigna and/or Humana. The Wall Street Journal report late Monday also said UnitedÂHealth might be interested in Cigna.
UnitedHealth, Aetna, Anthem, Cigna and Humana are five of the largest for-profit health insurers in the country by revenue.
"These reports are a continuation of the recent consolidation theme in the managed-care industry," the Oppenheimer note said.
UnitedHealth shares closed at $121.55 per share, up 2.2 percent on the day. Aetna shares gained 3.3 percent, closing at $124.97.
The pressure for mergers follows large-scale changes in the U.S. health care landscape ushered in by the Affordable Care Act.
In theory, the law should have been a boon to insurers by mandating that nearly all Americans carry health insurance. But the complex law also applied financial pressure by setting strict rules for how much of members' premiums insurers can keep as profits, removing insurers' ability to reject members for pre-existing health conditions and exposing rate increases to public scrutiny. Hospital systems have also grown larger in mergers of their own, giving them more bargaining power to negotiate rates with payers.
In response, insurers have been trying to figure out how to diversify their operations while growing their scale to weather the storm.
"As we have been discussing, industry consolidation will remain a key topic, as the largest plans take advantage of the cheap cost of capital and attractive synergies from potential acquisitions," Oppenheimer analysts wrote.
How the trend will affect UnitedHealth is unclear.
In March, UnitedHealth announced it was beefing up its business line for managing large prescription-drug insurance plans — a business called "pharmacy benefit management," or PBM — with a $12.8 billion cash offer to acquire the nation's fourth largest PBM company, Catamaran. The deal has not yet been approved by regulators, but it would make UnitedHealth the largest company in Minnesota ranked by revenue.
Stock analysts said the Catamaran deal could complicate other mergers and acquisitions for UnitedHealth.
Deutsch Bank said that of the seven possible insurance-industry acquisitions in rumor stages today, the UnitedHealth-Aetna tie-up comes in third in terms of how it could improve profitability.
For 2016, the analysts proÂject that UnitedHealth would post operating earnings per share of $7.30 on its own, or $7.74 per share if it combines with Aetna. Its total revenue would change from a projected $181 billion as a stand-alone company that year to $247 billion that year as a combined entity.
Joe Carlson • 612-673-4779
Twitter: @_JoeCarlson
