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Cigna could collect $1.85B from Anthem, turn acquirer if merger fails

CignaCorp. could soon be hunting for acquisitions of its own if its to falls through, thanks to apotential $1.85 billion windfall from the deal's failure.

The Connecticut-based insurer is poised to receivethe hefty sum as a "reverse termination fee" it negotiated with Anthemin case the companies' merger fell apart. Now that a federal antitrust lawsuit stands in front of the combination,analysts said Cigna is increasingly likely to be looking at a future as an independentbut significantly richer health insurer.

The flood of new cash could quickly turn Cigna froma seller to a buyer, as it looks to establish its place in a healthcare market stillfixated on consolidation, analysts said. The company could be eager to bulk up inmore lucrative parts of the sector such as Medicare or Medicaid, Leerink Partnersanalyst Ana Gupte wrote in a note to clients, making smaller operators includingWellCare Health Plans Inc.and Molina Healthcare Inc.potentially attractive targets.

"A [Cigna] combination with [WellCare] or [Molina]can be strategically attractive given the entry for [Cigna] into Medicaid and particularlyDual Eligibles markets, which has been an area of interest," she wrote.

Adding WellCare to its portfolio would give Cignaaccess to Medicaid markets in eight states, including the coveted states of Florida,Georgia and Kentucky, where WellCare already serves 1.7 million members. The Floridainsurer could enhance Cigna's Medicare Advantage membership as well, Gupte said,bolstering its presence in 10 states as well as adding four new markets.

Molina Healthcare, meanwhile, offers a more Medicaid-centricopportunity. Gupte estimated that buying Molina would further diversify Cigna'sportfolio by instantly growing its Medicaid operations to 20% of its total businessand expanding Cigna's footprint by another 10 states. Cigna's Medicaid segment currentlyaccounts for just 1% of its total health insurance book.

Either deal could likely be funded mostly in cash,Gupte added. Cigna already boasts about $4 billion of excess capital, and poolingthat with the $1.85 billion termination fee would bring it close to the price tagneeded to acquire Molina, which Gupte said would be a more affordable deal basedon its valuation.

Perhaps the significant challenge could be persuadingone of the companies to sell. Gupte speculated that Molina might be open to a takeoutin 2018, but other analysts took a more skeptical view.

"Unless Cigna changes their strategy and decidesto focus on the government side, I don't think Molina or Centene Corp. will be a proper candidate for them to acquire,"S&P Global Market Intelligence analyst Jeffrey Loo said, arguing that it couldrepresent too significant of a shift so soon after its attempted merger with Anthem.

Cigna could instead opt to put the breakup fee towardstock repurchases, he said, as a way to supplement its dividend and keep investorshappy. Cigna's dividend yield is just 0.03%. By comparison, Anthem pays a 1.85%dividend yield.

Analysts have increasingly shifted their attentionto Cigna's stand-alone prospects over the past week, after the Department of Justicesued to block its planned merger with Anthem. Yet even before the federal agencyintervened, there were doubts about the companies' ability to close the merger.Cigna and Anthem have had a reportedly rocky relationship since striking the multibillion-dollaragreement in July 2015, with both companies accusing each other of violating themerger agreement.

When the Justice Department filed its lawsuit July21, the two companies had markedly contrasting reactions, with Anthem threateningto challenge the litigation and Cigna expressingdoubt over whether it could complete the deal this year.

"In light of the DOJ's decision, we do not believethe transaction will close in 2016 and the earliest it could close is 2017, if atall," Cigna said in a statement.

Given those differences, it is unclear whether Anthemwill willingly hand over $1.85 billion should the merger fail. Cigna is requiredto fulfill all of its documentation requirements and cooperate with Anthem in attemptingto close the deal, analysts said. With that much money potentially on the line,both companies will likely keep a close eye on each other's actions.

"Theyare not going to make any payments to Cigna until the deal culminates," Loosaid. "Cigna needs to wait till this whole thing is complete."