Cigna talks about Plan B as U.S. challenge to Anthem bid looms

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Cigna Corp. CEO David Cordani faces a tough task: persuading investors and lawyers that the health insurer is committed to a troubled $48 billion takeover by Indianapolis-based Anthem Inc., while also talking up its prospects as an independent company.

Cigna met with investors this week to discuss the merger, which Cordani says he still supports, and also talk about his Plan B—stock buybacks or acquisitions if the deal falls apart, according to notes to investors from Wolfe Research and Goldman Sachs Group Inc. Last week, the insurer held its first earnings conference call since Anthem’s takeover was announced a year ago.

“This is a sign that Cigna doesn’t think that the deal’s going to happen,” Les Funtleyder, a health care investor at E Squared Asset Management, said by phone. “Why would you take the time and expense to meet with investors if you thought that in the short term there was going to be a transaction?”

Cordani also laid out to investors how Cigna might deploy its capital if the acquisition falls apart, according to a note to investors from Wolfe Research analyst Justin Lake. With $2.45 billion in cash and equivalents at the end of June, plus short-term investments and a $1.85 billion breakup fee from Anthem, Cigna could have more than $5 billion to spend on acquisitions or share buybacks by the middle of next year. Cigna also could spend even more by taking on debt, Lake wrote. The remarks reiterated what Cigna told investors on its second-quarter earnings call.

CEO’s commitment

Cordani’s tone was “demonstrative” on the company’s commitment to the deal, Lake wrote. “The company doesn’t think parsing language in press releases or media reports is an accurate representation of the effort made by management and employees to see the deal get done.”

Matthew Borsch, a Goldman Sachs analyst, also held investor meetings with Cigna. He estimates the company could have at least $10 billion of cash to spend, taking the borrowing into account. The insurer has said its priorities are supporting its existing business, strategic acquisitions and returning funds to shareholders, Borsch wrote. In his note, Borsch said he wouldn’t take a position on whether Anthem and Cigna can beat the Justice Department suit seeking to block their tie-up.

Changing signals

Since the department challenged Anthem’s takeover in late July, Cigna has oscillated in its public responses. The Bloomfield, Connecticut-based company first said it was evaluating its options and cast doubt on whether the deal could be completed. In the earnings call the next week, Cordani said the company was committed to its obligations, though he later qualified those remarks in response to a question from an analyst.

Anthem itself said in court on Thursday that there is “contentiousness” with Cigna and that the target company’s top management is “no longer interested in being pursued.” The bad rapport between the insurers stems from before the deal was struck, when Cigna rejected Anthem’s initial overtures, in part over a dispute about what role Cordani would have at a combined firm. Anthem also has held meetings with investors to discuss its prospects if a deal can’t be completed.

Humana Inc., whose takeover by Aetna Inc. also is being challenged by the U.S., has held investor meetings each quarter, according to Tom Noland, a company spokesman. Aetna recently met with investors, and the topics of discussion included the company’s strategy if it can’t complete the Humana acquisition, according to a note from Wells Fargo & Co. analyst Peter Costa.

Matthew Asensio, a Cigna spokesman, declined to comment, as did T.J. Crawford at Aetna. Bonnie Jacobs at Anthem didn’t return requests for comment.

Struggling disability unit

In Cigna’s investor meetings, the company also provided details on struggles at its disability and life insurance unit, as well as on the Affordable Care Act exchanges, according to Borsch. Cigna reported second-quarter results last week that missed estimates and slashed its 2016 profit forecast, driven by a loss at the disability and life unit. The company said it was working to improve results at the business.

“Our key takeaway is positive as the further detail strengthens our confidence that these issues are temporary and fixable,” Borsch wrote. “We highlight stock upside of 30% to our $160 price target for Cigna.”

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