Healthcare M&A: Who Will Be The First Domino To Fall?

A new report by Oppenheimer analyst Michael Wiederhorn looks at the favorable M&A environment in the healthcare sector. Wiederhorn discusses the reasons why now is the right time for consolidation and which names are likely buyout targets.

Why Now?

Low cost of capital is the primary motivation behind healthcare providers looking to acquire new plans. In addition, minimum medical loss ratios (MLRs), growth in higher MLR products and the fixed costs associated with Obamacare are also good reasons for healthcare providers to seek to scale up their businesses.

Rumors Swirling

Gossip surrounding healthcare M&A has been heating up in recent weeks. After recent reports circulated that Humana Inc HUM had hired bankers to prepare the company for a sale, Humana has now become a popular topic in M&A speculation.

In addition, reports surfaced this week that Cigna Corp CI rejected a $175/share buyout offer from Anthem Inc ANTM, UnitedHealth Group Inc UNH could be interested in buying Aetna Inc AET and/or Cigna and Aetna could be exploring an acquisition of Humana.

Potential Accretion

According to the Oppenheimer report, any of the potential deals in the space would be accretive for the stocks involved, but a potential deal between Anthem and Cigna offers the highest upside at 20 percent. Oppenheimer sees 14 percent upside to a potential Aetna/Cigna deal and 6 percent upside to a Aetna/Humana deal.

Oppenheimer’s Take

Oppenheimer believes that the winners and losers from the coming wave of M&A will become apparent in upcoming weeks. “Overall, we believe that consolidation is inevitable at this point, as the stock prices are being supported by the takeout premiums and potential accretions from M&A,” Wiederhorn explains.