With all signs pointing to the Department of Justice filing to block the merger, one needs to now consider the opportunity to own Anthem on a stand alone basis. The stock trades at a meager $135 as the market lost enthusiasm for the merger benefits and the possibility of a block became more probable.
The big hiccup in owning Anthem was the $1.85 billion breakup fee that the parties now appear willing to negotiate (via New York Post). Otherwise, Anthem has until January to continue the fight and of course Cigna wants to move forward.
Despite offering a price of $188 with Cigna trading around $135 before the stock spiked based on the leaked proposal, the deal offered over 10% accretion in earnings due to the offering being roughly 55% cash. Aetna planned to use cheap debt to boost earnings.
So while the DOJ plans to block the merger due to antitrust concerns, Anthem can return back to stock buybacks that the company paused during the merger process. Prior to the merger, Anthem regularly purchased over 7% of the outstanding stock on an annualized basis. These buybacks directly boost future earnings per share numbers.
Anthem ended Q1 with $4.2 billion remaining on the Board-approved share repurchase authorization. The amount equates to roughly 11% of the outstanding shares. When combining the potential stock buybacks with a 2% annual dividend, the capital return potential provides a very appealing opportunity going forward.
The stock is attractively priced now after the big dip to $135. The forward P/E ratio has dipped to 11x due to solid earnings expectations without Cigna.
When Anthem traded at the high multiple in mid-2015, a buyout of Cigna made sense. The cheap debt and synergies would've helped grow earnings in a manner not possible by stock buybacks at he higher stock price. Now that Anthem has fallen to $135, 2017 EPS expectations are solid, and the potential for a reduced breakup fee, the insurance provider is appealing based on the cheap valuation and accretive nature of stock buybacks.
Similar to how the stock peaked prior to the official merger announcement, Anthem appears to have already hit the lows based on fears of a blocked merger with Cigna. The time to sell has passed and a new opportunity to own the stock has emerged.
Disclosure: I am/we are long ANTM.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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