Humana dives again on fears $37B Aetna merger is unraveling; JP Morgan warns stock could plunge to $115 if deal collapses

A news summary, focused on 10 big employers; updated 4:53 p.m.

HUM three days
Humana’s stock has tumbled 12% over last three days.

The probability of the Justice Department approving the deal has now declined well below a 50/50 chance, JP Morgan said in a report today. If the deal bombed altogether, the Louisville insurer’s shares could fall to a range of as low as $115 to $125, the investment bank said.

Humana’s unexpected plunge came as suitor Aetna was to meet with top Justice Department officials today as it seeks to win antitrust approval for its takeover of Louisville-based Humana, multiple media outlets have been reporting. The Hartford insurer’s meeting was to include the DOJ’s No. 3 official, a top-level gathering that signals the review is entering a final, make-or-break stage, according to Bloomberg News, which cited sources it didn’t identify.

“We have long held that only HUM shares have material downside if the DOJ were to block the pending acquisition by Atena,” JP Morgan’s Gary Taylor said in in his report.

Humana’s stock closed moments ago down 2.7%, or $4.35 a share, to $158.15. It fell another $1.14 in extended trading. Yesterday, it fell a far steeper 10% on sales volume more than six times normal — the biggest one-day drop in four years. It was Humana’s lowest closing price since Feb. 12, when shares hit $160.37.

Aetna’s stock was recently up 1.3%, or $1.43, to $116.89; yesterday, it closed down 4%.

Humana building
Humana tower downtown.

“The meeting falls two weeks after a similar Justice Department session with Anthem and Cigna, which are pursuing their own $48 billion merger,” Reuters said. “While department officials are concerned that the Anthem-Cigna tie-up may stifle competition, Aetna is arguing that its deal is different: It maintains that its overlap with Humana is small and any loss of competition is easily fixable, according to a person familiar with the insurer’s thinking who, like the others, asked not to be identified discussing a private matter.”

Today’s purported meeting was first disclosed at 12:28 p.m. ET yesterday by antitrust trade site MLex. At least three other media outlets quickly followed with their own reports, although CNBC and Reuter attributed their stories directly to MLex (Bloomberg, CNBC and  Reuters).

State regulators divided

The Humana-Aetna deal has been on a regulatory roller-coaster for months, as have shares in the two companies. Last week, Reuters reported Aetna was auctioning off about $1 billion in assets in a divestiture move to appease the DOJ. Illinois insurance regulators on June 23 became the 17th state to sign off on the deal, the Hartford Courant reported.

But that same day, top regulators in the nation’s biggest insurance market, California, arrived at a split opinion. One regulatory agency urged the DOJ to block the deal; the other said it approved the tie-up with conditions,  including that Aetna hold down premium increases and invest $50 million in local communities, Reuters said.

Aetna first disclosed the deal July 3, 2015, in a cash-and-stock offer worth about $230; the breakdown was $125 in cash and 0.8375 Aetna shares, based on Aetna’s closing price the day before the deal was announced.

But Humana shares never traded near there, indicating Wall Street had doubts it would be consummated. The highest Humana shares traded since was $192.49. They traded as low as $157.01 on Feb. 11.

The proposed deal was quickly followed by the Anthem-Cigna proposal as insurers consolidated in a health care market where prices continued to rise. By 2018, Aetna projected $1.25 billion in unspecified “synergies,” which could mean savings by eliminating duplicate functions between the two companies — or through higher premium pricing, which would concern the DOJ’s antitrust division.

Deal’s Louisville impact cloudy

Overall, the deal would create an insurance colossus, with a combined $114 billion in annual revenue, 60 million members, and 110,000 employees. Humana, started in Louisville in 1961, has more than 21.3 million members and does business in all 50 states. It has approximately 50,000 employees, including about 12,500 in Louisville. Last year’s revenues were $54 billion.

The specific impact on Humana’s operations in the city has remained unclear. Announcing the deal, Aetna said it “maintains commitment” to the city. But in recent months, the Hartford insurer has declined to make the same guarantee to Connecticut.

Mark Bertolini
Bertolini

In May, CEO Mark Bertolini told the annual stockholders meeting Aetna was required to establish a Kentucky presence when it sought to buy Humana. “Having said that,” he told shareholders, “the rest of all of our real estate is under review.” Also, the Connecticut Insurance Department lacks the legal standing to require Aetna to retain its state headquarters if the deal is completed.

Louisville and other cities would compete heavily for Aetna’s headquarters and the lucrative jobs and corporate status it would bring. Connecticut has much to lose: Already, General Electric is moving its headquarters to Boston from Fairfield. And assuming the Anthem deal is concluded, Cigna’s headquarters in Bloomfield could be at risk.

In other news this morning, at TEXAS ROADHOUSE in Columbia, S.C., the restaurant chain agreed to pay two waitresses  $700,000 in a class-action settlement after they filed a federal lawsuit under the Fair Labor Standards Act. Rachel Bontempi and Tiffany Tatham said they were paid $2.13 an hour while their tips went into what the suit called an “invalid tip pool.”

The pool was then split among the wait staff and other employees, some of whom did not “serve customers or have any interaction with them,” the suit said, according to WYFF.

Even as they agreed to the settlement, Texas Roadhouse attorneys denied the restaurant chain “engaged in any wrongdoing.” The company settled to avoid the “expense, inconvenience and distraction of further litigation.”

The suit was settled as a class action, meaning others who worked under the tip pool at certain Texas Roadhouse restaurants in South Carolina’s Columbia and Anderson will be eligible to receive benefits (WYFF).

UPS: In Beaumont, Texas, a family is suing UPS and several related entities, claiming the shipper’s negligence caused a vehicle crash that killed a relative June 17 (SE Texas Record).

In Chelmsford, Mass., a package handler has sued UPS for refusing to pay him at least three hours’ wages required under state law for every shift cancelled or shortened after employees arrive at the work site. Cort Szafarz, who says he worked part-time from September 2014 to May 2015, is seeking class-action status for the case he filed in federal court last Friday. When he complained to the company, he said he was told, “that’s just the way we do it here,” according to his suit (press release).

AMAZON is facing even more competition for seasonal help. Retail order management company Radial is hiring 3,200 working in the Louisville area during the holiday season. The company operates distribution centers in Louisville and Shepherdsville, where Amazon employs 3,000 at a center of its own; the retailer employs another 3,000 at a second center in Jeffersonville (WDRB). More about Amazon in the Louisville area.

Finally, U.S. stocks rallied this morning as domestic job growth roared back in June, according to the Labor Department. Nonfarm payrolls rose by a seasonally adjusted 287,000 in June, the Labor Department said, the strongest month of hiring since last October, according to The Wall Street Journal. The jobless rate rose to 4.9% in June from 4.7% in May (WSJ and Google Finance).

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