8-K: Cigna to Sell Medicare Businesses to Health Care Service Corporation for $3.7 Billion

Cigna has agreed to sell its Medicare Advantage, Supplemental Benefits, Part D, and CareAllies businesses to Health Care Service Corporation for approximately $3.7 billion, expecting to close the deal in the first quarter of 2025.

Summary

• Cigna has entered into an agreement to sell its Medicare Advantage, Cigna Supplemental Benefits, Medicare Part D, and CareAllies businesses to Health Care Service Corporation (HCSC) for a total of approximately $3.7 billion.
• The transaction is expected to close in the first quarter of 2025, pending regulatory approvals and other customary closing conditions.
• Cigna anticipates recognizing a pre-tax loss of $1.5 billion in net income as of December 31, 2023, primarily due to asset write-offs and costs associated with the sale.
• This loss will not affect Cigna's adjusted income from operations or adjusted income from operations per share for the fourth quarter of 2023.
• Evernorth Health Services, a Cigna subsidiary, will continue to provide pharmacy benefit services to the Medicare businesses under a four-year service agreement.
• Cigna plans to use the majority of the proceeds from the sale for share repurchases.
• The transaction is expected to be accretive to Cigna's adjusted earnings per share in 2025.
• Cigna has reaffirmed its 2024 outlook, targeting adjusted income from operations of at least $28 per share, and its long-term annual adjusted earnings per share growth target of 10 to 13 percent.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive. While there is a significant loss on the sale, the strategic move is expected to benefit the company in the long term through increased focus, share repurchases, and accretive earnings. The reaffirmation of 2024 targets and long-term growth goals also contributes to the positive sentiment.

Positives

• The sale allows Cigna to focus on its core health benefits and Evernorth Health Services platforms.
• The transaction is expected to be accretive to Cigna's adjusted earnings per share in 2025.
• Cigna will use the majority of the proceeds for share repurchases, potentially increasing shareholder value.
• The company has reaffirmed its 2024 outlook and long-term growth targets.
• The four-year service agreement with Evernorth ensures continued revenue from the divested businesses.

Negatives

• Cigna will recognize a pre-tax loss of $1.5 billion due to the sale.
• The sale indicates that Cigna's Medicare businesses require disproportionate investment compared to their size within the portfolio.
• The transaction is subject to regulatory approvals and other closing conditions, which could delay or prevent the sale.

Risks

• The transaction is subject to regulatory approvals, which may not be obtained or may be delayed.
• There is a risk that the closing conditions may not be satisfied, potentially terminating the agreement.
• The sale could lead to uncertainty and divert management's attention from ongoing operations.
• There is a risk of unexpected costs or expenses related to the transaction.
• The company faces risks related to litigation and regulatory actions associated with the transaction.
• Cigna's future performance is subject to various market and economic risks, including competition, inflation, and changes in healthcare regulations.

Future Outlook

Cigna expects the transaction to be accretive to adjusted earnings per share in 2025 and plans to use the majority of the proceeds for share repurchases. The company has reaffirmed its 2024 outlook and long-term growth targets.

Management Comments

• David M. Cordani, Chairman and CEO of The Cigna Group, stated that the transaction will enable the company to drive meaningful value for all stakeholders and accelerate investment and growth in its services platform.
• Maurice Smith, HCSC's CEO, President and Vice Chair, said that the acquisition supplements their growth strategy in the Medicare marketplace and will bring many opportunities to HCSC and its members.

Industry Context

This transaction reflects a trend of healthcare companies streamlining their portfolios and focusing on core businesses. Cigna's decision to divest its Medicare businesses suggests a strategic shift towards its services platform and health benefits platform, while HCSC's acquisition indicates a desire to expand its presence in the Medicare market.

Comparison to Industry Standards

• Cigna's divestiture of its Medicare business is similar to other large healthcare companies that have recently streamlined their portfolios to focus on core competencies.
• The $3.7 billion transaction value is a significant deal in the healthcare sector, comparable to other large acquisitions in the insurance and healthcare services space.
• The expected accretion to adjusted EPS in 2025 is a common goal for companies undergoing strategic transactions, similar to other companies that have divested non-core assets.
• The use of proceeds for share repurchases is a typical capital allocation strategy for companies looking to enhance shareholder value, similar to other companies in the sector.

Stakeholder Impact

• Shareholders may benefit from the share repurchases and expected increase in adjusted earnings per share.
• Employees in the divested businesses will transition to HCSC.
• Customers of the Medicare businesses will be served by HCSC.
• Suppliers and partners of the divested businesses will now work with HCSC.

Next Steps

• Cigna will seek regulatory approvals for the transaction.
• The company will work to satisfy the closing conditions for the sale.
• Cigna will provide updated guidance with its fourth quarter earnings release on February 2, 2024.
• The company will allocate the majority of the proceeds from the sale to share repurchases.

Key Dates

Keywords

Cigna, Medicare Advantage, Health Care Service Corporation, HCSC, Medicare Part D, CareAllies, Divestiture, Share Repurchase, Evernorth Health Services, Healthcare, Acquisition