Volatility Rising for AET as Merger Verdict Looms


Re-Tweet
Share on Facebook
Share on Google+
Share on LinkedIn

Uncertainty surrounding a planned merger between insurers Aetna (AET) and Humana (HUM) has been rising recently.  The government has sued to block the merger, and a verdict in the action is set to be rendered in the near future. 

Last week, final arguments concluded in a federal court hearing, as regulators presented their case against the proposed merger.  U.S. District Judge John D. Bates is now set to issue his verdict, which he has said will come out in a "timely manner." However, he did not specify a precise time.

The options market has reflected the growing uncertainty about the merger.  Implied Volatility (IV) for Aetna began rising in late September.  The advance has continued steadily over the last few months, accelerating higher in the past week or so.  IV is now at 39, just off a mark reached in February.

While the precise date for the verdict is unknown, the options market seems to be looking for an announcement in the next couple weeks. The January 20 expiration has the highest level of interest at this point by far.  The ATM Straddle premium for January 20 is $8.46, or 6.9%.  For January 6, the premium stands at $3.28, or 2.7%, while the January 13 expiration stands at $5.62, or 4.6%.

For Humana, IV has risen recently as well, reaching 47.6, its highest level since July 2016, when the DOJ filed its lawsuit to stop the merger.  The ATM Straddle premium for the January 20expiration is $16.96, or 8.6%.

In July 2015, Aetna announced the cash-and-stock deal to acquire with Humana.  At the time the merger was announced, Aetna touted the benefits of acquiring Humana's Medicare Advantage business.  The merger was meant create a company serving the most seniors in the Medicare Advantage program and the combined company was set to become the second-largest managed care firm in the United States.

At the time it was announced, the deal was slated to close sometime in the second half of 2016.   However, regulators have opposed the merger on the grounds that it would harm senior citizens who buy private Medicare plans. 

Meanwhile, another major health insurance merger - Anthem's (ANTM) takeover of Cigna (CI) - is also being opposed by regulators.  The four companies involved in the two separate transactions are each among the country's five largest insurers.  Regulators worry that consolidation will hurt competition in the health insurance market.

As an example of what happens when regulators reject a merger deal involving public companies, we can look at the 2015 case of utilities Exelon (EXC) and Pepco.  In August of 2015, DC regulators rejected the proposed merger between the two companies, even though the deal had been approved by other authorities. 

On August 19, Exelon stock closed at $34.18.  But, as the DC regulatory decision became apparent, the stock fell off, retreating to a close of $30.40 on August 25.  It bounced back slightly, but fell again as the announcement was made on August 31.  It reached a close of $29.96 on September 1 and drifted further lower toward the end of the year.  It hit a closing low of $25.46 on December 14, off nearly 26% from its pre-regulatory decision levels.

DC regulators eventually reversed their decision and the Pepco-Exelon merger was approved in March of 2016.  Exelon climbed throughout the early part of 2016 and eventually reached a 52-week high of $37.70 before moderating.  After a choppy second half of the year, it is currently trading at around $35.50.