UnitedHealth Stock Rises on Report of Aetna Bid

UnitedHealth Group declined Tuesday to address acquisition rumors that sent the company’s stock up more than 2 percent.

Citing unnamed sources, The Wall Street Journal reported late Monday that the for-profit insurance giant, based in the Minneapolis suburb of Minnetonka, Minn., recently made a preliminary takeover offer for insurance rival Aetna.

The deal would likely have a value of at least $42 billion; one financial model published Tuesday morning put the price closer to $64 billion.

The report appears to fit with the overall mood in the for-profit insurance sector, which stock analysts say is ripe for a spate of mergers. Bigger insurers are seen as having more ability to meaningfully grow 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 morning. “(Monday’s) fusillade of media headlines suggest that all of the industry leaders are fully mobilizing their financial arsenals for the developing consolidation showdown.”

Analysts at Oppenheimer & Co., in an investor note Monday headlined “Consolidation Reports Continue to Swirl,” noted the latest speculation follows news in Bloomberg and elsewhere that insurer Anthem may be considering bids to buy rivals Cigna and/or Humana. The Wall Street Journal also reported Monday that UnitedHealth may 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 spokesman Mason Tyler said via email: “We are not commenting on rumors or speculation.”

In theory, the Affordable Care Act 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. Hospitals 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 also 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.

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-Aenta tie-up comes in third in terms of how it could improve profitability.

For 2016, the analysts project that UnitedHealth would post operating earnings per share of $7.30 on its own or $7.74 if it combines with Aetna. Its total revenue would change from a projected $181 billion in 2016 as a stand-alone company to $247 billion that year as a combined entity.

In regular trading Tuesday, UnitedHealth shares rose $2.57, or 2.2 percent, to $121.55. In after-hours trading, the shares rose another 34 cents to $121.89.