Anthem-Cigna deal starts to spook investors

The longer the Anthem-Cigna deal takes to wrap up, the more nervous Wall Street becomes that the $48 billion combination might not happen.

“Will the deal close? Who knows?” wrote analyst Thomas A. Carroll at Stifel Nicolaus & Co. in a May 22 report to clients.

Brian Wright, an analyst at Sterne Agee CRT, is nervous, too. He lowered his rating on Anthem from “buy” to “neutral” on May 24, saying the Indianapolis-based insurer's soft first-quarter earnings “along with reports that the acquisition of Cigna is in trouble moves us to the sidelines.”

Sarah James, an analyst at Wedbush Securities, wrote June 1 that her confidence in the acquisition's closing has fallen from 80 percent in March to 60 percent in May.

What’s going on? Clearly, some analysts think things are too quiet, and they wonder if the deal's in trouble.

“This has been an extremely information-tight process so far with little available information on the process or current timing of things,” Carroll wrote.

Then, there was a series of unsettling events. First, Cigna reported in early May that the deal might not be approved this year, raising questions about whether the transaction is in trouble with regulators.

The deal requires approval from the U.S. Department of Justice’s Antitrust Division, as well as state insurance regulators. So far, 12 of 26 states that would be affected have approved the deal. The Indiana Department of Insurance was the latest, giving the green light on May 26.

The next shoe dropped on May 22, when the Wall Street Journal reported the two companies were privately bickering, accusing each other of violating the merger agreement and “fumbling submissions to regulators.”

“The squabbles could delay or derail antitrust approvals, which are typically harder to obtain if both parties aren’t in sync,” the paper reported.

That made some analysts even more jittery.

“Where there is smoke, there is fire,” Wright wrote on May 23. He added: “It would appear that finger-pointing has already begun as executives appear quite nervous about the deal’s prospects, in our opinion.”

Over the next two days, Cigna’s stock dropped 4.9 percent, and Anthem’s 2.6 percent, although both have since bounced back a bit.

“The market seems to be implying a low probability that the transaction will be consummated,” wrote UBS analyst A.J. Rice in a May 23 note.

Anthem says it remains confident the deal will take place. At a UBS investor conference on May 24, Anthem CEO Joe Swedish said the deal is on track, despite media reports to the contrary.

“Notwithstanding all the noise out there, media relations and other kinds of pieces—bits and pieces of information—the reality is, the process is progressing extremely well,” he said.

He added that the two companies were “working very, very well together. And I think that we are incredibly well aligned. … So I am not too distracted by all of that noise.”

Still, he acknowledged the regulators were taking a good, hard look at the deal.

“This regulatory review has a very, very long tail to it,” he said. “I think I am stating the blindingly obvious. It is something that we knew would be kind of a hill to climb for a lengthy period of time until we get the DOJ determination that we think is in the not-too-distant future.”

So will the two companies pull off the deal?

Wall Street seems to be watching with one eye on the headlines, and another hand on its wallet.