E Health Insurance Merger Mania: Who's Next ?

Last month, Cigna rightly rejected an acquisition offer from fellow insurer Anthem at $47.5B, or $184 for each Cigna share.  Probably that is very low acquisition price for such a firm like Cigna. If it is too low, what is the appropriate target price for Cigna?

Here is my estimate of appropriate value of Cigna if any rivals like UnitedHealth or Anthem attempts to acquire Cigna. Here I used relative valuation data from Health insurance industry data prior to merger activity announce; that is, from July 2 data.

Comparable market data:

Here I calculate average Price to Earnings, Price to Book, Price to Operating Cash flow and Price to Sales for all Cigna’s four major competitors. I used the averages from this table and multiplied with Cigna’s actual trailing twelve month earnings, book value (current), and cash flow per share and sales per share data. Now I averaged appropriate price obtained from these metrics in the below table.

These above calculations came out with Cigna’s appropriate value, using relative valuation metrics, as $164.03, which is very close to Cigna’s market price of $161.29 on July 2.

Now let me estimate the appropriate target premium Cigna should get given the data of the two acquisitions recently announced in the Health Insurance industry.

Takeover Premium Measure:

With an average takeover premium of 21.72% from the pre-acquisition price; Cigna should only accept any offer that is more than $199.66 based on Cigna’s estimated price of $164.  With all the mergers and acquisitions and dire need to cost cuts and to realize synergies among companies, Cigna is the right candidate in the Health insurance industry consolidation. If there is any acquisition announcement from Anthem or United Health in near future I am estimating the appropriate target price for Cigna should be $200 or above. 

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Disclosure : Long on Cigna

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Ravindra Dasari 5 years ago Member's comment

Excellent analysis. Thanks for posting.

Susan Miller 5 years ago Member's comment

Excellent analysis, thank you.

Craig Newman 5 years ago Member's comment

Thanks for sharing, I've added you to my follow list.