Cigna seeks to terminate merger with Anthem, sues insurer for $13B

Simmering tensions between Anthem Inc. and Cigna Corp. exploded Tuesday as Cigna sued to end their $48 billion deal, and Anthem moments later said it would fight to keep the merger alive.

Cigna, as part of its lawsuit against Indianapolis-based Anthem, is seeking a $1.85 billion breakup fee, plus $13 billion in additional damages it says are owed after “the path for regulatory approval of the transaction was fatally compromised” by the larger insurer.

“Cigna believes that the transaction cannot and will not achieve regulatory approval and that terminating the agreement is in the best interest of Cigna's shareholders,” the Connecticut-based company said in a written statement. 

The announcement came five days after a federal judge ruled the proposed plan would violate antitrust laws by reducing competition among insurers.

Anthem, which filed paperwork Monday to appeal the case, responded almost immediately Tuesday by saying Cigna does not have the right to cancel the deal on its own.

"Under the terms of the merger agreement, Cigna does not have a right to terminate the agreement. Therefore, Cigna’s purported termination of the merger agreement is invalid," Anthem said in a written statement.

Anthem said it had extended the proposal through April 30 after the deal was blocked.

The announcement came hours after another major insurer, Aetna, said it was abandoning its planned $34 billion purchase of Medicare Advantage provider Humana.

The Department of Justice sued last summer to stop the deals due to concerns about how they would affect prices and consumer choices. Federal judges rejected both deals.

Cigna said it needed the $13 billion in damages to protect shareholders.

“These additional damages include the amount of premium that Cigna shareholders did not realize as a result of the failed merger process,” the company said. “This action is necessary to enforce and preserve Cigna's rights and protect the interests of its shareholders. The company believes strongly in the merits of its case and hopes that this matter is rapidly resolved.”

Tensions between Anthem and Cigna have been evident since before the Justice Department sued in July to stop the merger, which the government said would reduce competition and reduce choice for consumers. At a court hearing in August, an Anthem lawyer said there was “contentiousness” with Cigna and that the smaller insurer intended to walk away after the deadline rather than extend the effort.

In her ruling last week rejecting the tie-up, U.S. District Judge Amy Berman Jackson cited the discord between the insurers as “the elephant in the courtroom.” Cigna didn’t join in Anthem’s appeals court filing.

The bad rapport between the insurers stems from even before the deal was struck in July 2015. Cigna had rejected Anthem’s initial overtures, in part over a dispute about what role Cigna CEO David Cordani would have at a combined firm.

The fact that the two tie-ups were called off on Valentine’s Day wasn’t lost on analysts.

“Valentine’s Day is turning out to be the day of broken mergers,” Evercore ISI analyst Michael Newshel wrote in a note to investors titled “breaking up is hard to do.”

A settlement between Anthem and Cigna is still “the most likely (and best) outcome,” said the analyst, who recommends holding Cigna stock. “Ultimately we view the latest developments as posturing in what comes down to a legal fight over the breakup fee.”

Anthem shares closed at $163.32 Tuesday, down 20 cents on the day, but had been trading at $165.48 just prior to Cigna's announcement. Cigna shares dropped more than $3 after the announcement but still finished up by 83 cents on the day, at $146.68 each.