Cigna- Humana merger has significant long-term strategic merit, says Stephens

After The Wall Street Journal reported yesterday that Cigna (CI) and Humana (HUM) are in formal talks to combine, with a cash-and-stock deal potentially being finalized by the end of the year, if the talks don’t fall apart, Stephens said the firm believes that such a merger has significant long-term strategic merit and believes it could survive a legal challenge by the DOJ that is “surely to come” with appropriate MA and PBM remedies. However, shares of both traded down following the report, which the firm attributes to investors’ worries that the deal structure could effectively look more like a merger-of-equals given converging market caps along with a likely extended, noisy, and stressful merger review process. The firm, which notes it had previously added Humana to Stephens’ Best Ideas List based on the call that Cigna may pursue an acquisition, has Overweight ratings on both stocks.