Aetna (NYSE:AET), a health insurer, said it would buy smaller rival Humana (NYSE:HUM) for about $37 billion in cash and stock, in the largest ever deal in the insurance industry.
Hartford, Connecticut-based Aetna said it would pay Humana shareholders $125 in cash and 0.8375 Aetna shares for each share held. The offer of about $230 per share is a 23 percent premium to Humana's closing price on Thursday.
Following the deal, Aetna shareholders would own about 74 percent of the combined company with Humana shareholders owning the rest. Aetna chief executive officer Mark Bertolini will serve as chairman and CEO of the combined company.
The deal is expected to close in the second half of 2016 and add to operating earnings per share from 2017.
Shares of Aetna sank 5.8 percent to $118.22 at 9:49 a.m. in New York, while shares of Humana added 2.6 percent to $191.95.
The deal will face antitrust scrutiny but if it goes through it would dwarf the previous largest insurance deal announced just this week, where Swiss property and casualty giant ACE (NYSE:ACE) announced it was buying Chubb (NYSE:CB) for $28 billion. It would also dwarf Anthem Inc's purchase of WellPoint in 2004 for $16.6 billion.
Aetna and Humana are in nine of the same states in Medicare Advantage. Combined, they would have market share of 88 percent in Kansas, 80 percent in West Virginia, 58 percent in Iowa and 51 percent in Missouri.
Aetna said the combined company is projected to have over 33 million medical members, based on memberships as of March 31. Operating revenue is expected to be about $115 billion this year, with approximately 56 percent from government-sponsored programs including Medicare and Medicaid.
Analysts have said that M&A activity in the healthcare sector had been waiting for last week's Supreme Court ruling on Obamacare, which upheld key subsidies that underpin the reform and thus gave more certainty to healthcare insurers. Anthem has offered to buy Cigna (NYSE:CI) to create the largest insurer in the country, toppling UnitedHealth Group (NYSE:UNH). Media reports have also said UnitedHealth could be eyeing Cigna and Aetna. On Thursday, Centene (NYSE:CNC) said it would buy smaller rival Health Net (NYSE:HNT) for $6.3 billion.
On the heels of the Aetna deal, Humana today cut its adjusted earnings outlook for the full year and issued downbeat guidance for the current quarter.
Humana said higher-than-expected Medicare Advantage admissions, among other items, prompted the guidance changes.
Humana said it now expects to earn an adjusted per-share profit of $7.75, down sharply from its previous estimate of $8.50 to $9. Adjusted earnings forecasts typically exclude one-time costs.
For the quarter ended in June, Humana predicted earnings of $1.60 to $1.65 a share, short of the $2.36 anticipated by analysts polled by Thomson Reuters.