Anthem, Cigna Clash Over Failed Deal

One company is seeking $15 billion. The other, $20 billion.

By Jef Feeley and David McLaughlin | February 25, 2019 at 01:19 AM

There’s no dispute that a $48.9 billion merger announced in 2015 between health insurers Anthem Inc. and Cigna Corp. imploded two years later over antitrust concerns. Now, the question is whether one owes the other billions for the deal’s failure.

A Delaware judge will start the process of deciding that pricey dispute Monday in a trial of dueling lawsuits by Anthem and Cigna over the merger meltdown.

Cigna, which would have been acquired by Anthem, says it’s the injured party and is demanding about $15 billion. Anthem, which runs Blue Cross and Blue Shield plans in more than a dozen states, insists it’s owed $20 billion because Cigna dragged its feet to sabotage the deal.

The case provides a look at one of the largest corporate deals in the U.S. to go sour and a courtroom version of the blame game. It features competing narratives about how the transaction — which would have created the largest American health insurer by membership — wound up on the rocks.

“It’s a little surprising that this didn’t settle and it has to be hashed out in court,’’ said Larry Hamermesh, executive director of the University of Pennsylvania’s Institute for Law and Economics and an expert in Delaware corporate law.

The companies will probably reach a settlement in which Anthem pays Cigna something less than the full amount of the breakup fee of $1.85 billion, said Ana Gupte, an analyst at SVB Leerink. That would help Cigna reduce debt taken on from acquiring Express Scripts Holding Co. for $52.7 billion. Cigna sold $20 billion of bonds in September to help fund the deal.

“They need to pay down that debt in the next 18 months,” Gupte said. “From their standpoint, a $1.8 billion breakup fee is meaningful.”

Brian Henry, a Cigna spokesman, said the company “strongly” believes in its case. Brooke Padilla, an Anthem spokeswoman, didn’t immediately return an email seeking comment.

Delaware Chancery Court Judge Travis Laster is no stranger to the two companies’ jousting over the deal. Laster ruled in May 2017 that Cigna could walk away from the merger because another court blocked the deal as anticompetitive.

The 10-day trial in Wilmington is set to feature testimony from top executives and Blue Cross Blue Shield Association Chief Executive Officer Scott Serota. He’s expected to testify about Cigna’s claims that Anthem violated a requirement to use its best efforts in addressing the merger’s anticompetitive effects and the government’s objections.

Anthem offered to buy Cigna in a 2015 cash and stock deal to bulk up and gain negotiating power to cut care-providers’ rates. Anthem officials also said the combination would pump up enrollment in its Medicare Advantage programs in high-growth states such as Florida and Texas. Those programs offer care to patients 65 years and older.

The U.S. Justice Department’s antitrust division sued in 2016 to block the tie-up, arguing it would further consolidate an already concentrated market and lead to higher costs for employers and consumers.

A federal judge in Washington backed the government’s position in 2017 and an appeals court upheld that ruling. Anthem asked Laster to keep the deal alive while it appealed the antitrust ruling to the U.S. Supreme Court, but he refused.

The Delaware judge said, however, he found significant evidence that Cigna may have violated the merger agreement by dragging its feet in trying to get antitrust clearance, which could entitle Anthem to “potentially massive damages.”

Executives at Indianapolis-based Anthem took Laster’s comments to heart and filed a $20 billion suit.

Anthem alleges Cigna CEO David Cordani — unhappy with his proposed role in the combined insurer — decided to derail the deal by “disengaging from the process.’’

During the antitrust trial, Cigna officials attempted to undermine projections of future savings from the corporate marriage, helping the Justice Department make its case to block it, Anthem claims.

In its suit, Cigna focused on Anthem’s allegedly wrongful conduct while the companies sought regulatory approval. In the guise of pushing the merger, Anthem sought to undermine Cigna’s business by stealing confidential information and harassing its customers, Cigna claims.

Since the deal sought to combine two of the four U.S. health insurers capable of serving large companies with employees in multiple states, Cigna executives recognized the government might nix the union on antitrust grounds, according to the lawsuit. That’s why the Bloomfield, Connecticut-based company negotiated to have Anthem pay a $1.85 billion termination fee if the deal was thwarted, Cigna said.

Anthem didn’t pay the breakup fee, Cigna said. And the company’s also seeking $14.7 billion from Anthem for what it claims is the premium its shareholders would have gotten if the deal were done.

The case is In Re Anthem-Cigna Merger Litigation, 2017-0114, Delaware Chancery Court (Wilmington).

https://www.thinkadvisor.com/2019/02/25/anthem-cigna-clash-over-failed-deal/