Perhaps it is just a case of pre-holiday weekend lethargy or a muted reaction to the June jobs report, but healthcare providers exchange traded funds are trading lower despite another round of deal-making in the industry.
Earlier Thursday, Centene (NYSE: CNC) said it will acquire rival Health Net (NYSE: HNT) for $6.8 billion in cash and stock, a purchase price that also includes the assumption of $500 million in debt.
“Under the terms of the agreement, Health Net shareholders would receive 0.622 shares of Centene common stock and $28.25 in cash for each share of Health Net common stock. Based on Centene’s closing stock price on July 1, 2015, the implied consideration of $78.57 per share represents a premium of approximately 21% over Health Net’s closing stock price on July 1, 2015, and of approximately 26% on June 1, 2015. Upon completion of the transaction, Centene shareholders would own approximately 71% of the combined entity, with Health Net shareholders owning approximately 29%. The transaction is expected to be significantly accretive to Centene’s diluted earnings per share in the first year following closing,” according to a statement.
Shares of Centene are down 4.7% on the news while Health Net is higher by just over 12%. The iShares U.S. Healthcare Providers ETF (NYSEArca: IHF), one this year’s top 10 sector ETFs, is off a quarter of a percent at this writing. The $1 billion IHF allocates about 4.1% of its combined weight to Centene and Health Net. [M&A Activity Lifts This Healthcare ETF]
It is just speculation, but perhaps a $6.8 billion deal, one announced right before Independence Day to boot, is not enough to thrill IHF investors. Not when the possibility of much larger deals for the ETF’s largest constituents looms.
For weeks, investors and the financial media have been expecting a wave of consolidation that could see marriages among some of IHF’s largest holdings. Earlier this week, Cigna (NYSE: CI) rejected a $47 billion takeover offer from Anthem (NYSE: ANTM). Anthem and Cigna are IHF’s fourth- and fifth-largest holdings, respectively, combining for over 13% of the ETF’s weight. [More M&A Coming for This Healthcare ETF]
Dow component UnitedHealth (NYSE: UNH) has made overtures for rival Aetna (NYSE: AET) while Aetna has been reportedly eying Humana (NYSE: HUM), according to the Wall Street Journal.
Any deals involving UnitedHealth, Aetna, Cigna, Anthem and Humana are likely to involve price tags that are seven or eight times, or more, larger than the $6.8 billion Centene is paying for Health Net. That $6.8 billion is also comparatively small to other deals that IHF constituents have engaged in. For example, UnitedHealth agreed to acquire Catamaran for $12.8 billion in cash earlier this year. In 2012, Express Scripts (NasdaqGM: ESRX), IHF’s second-largest holding, sealed a $29 billion acquisition of Medco. [More M&A Coming for This Healthcare ETF]
IHF’s primary rival, the equal-weight SPDR S&P Health Care Services ETF (NYSEArca: XHS), is also trading slightly lower today though it does not hold shares of Centene or Health Net.
Still, it is impossible to say investors are not enthused by these ETFs. IHF and XHS are up 21% and 17.1%, respectively, this year. IHF has added over a third of its $1 billion in assets under management this year while XHS has seen $60.6 million of its $197.8 million in AUM arrive since the start of the year.
iShares U.S. Healthcare Providers ETF
