Do Hedge Funds Love CIGNA Corporation (CI) Ahead of Merger?

Billionaire Larry Robbins discussed his hedge fund’s investments in both CIGNA Corporation (NYSE:CI) and Anthem Inc. (NYSE:ANTM) in a third-quarter letter to investors, saying that “In managed care, we were pleased, if not elated, to see two transactions announced amongst our four portfolio holdings [Glenview is also invested in Humana Inc. (NYSE:HUM) and Aetna Inc. (NYSE:AET), which also inked a merger agreement in 2015] that are each significantly value-creating for both buyer and seller and came at meaningful premiums”. The manager of Glenview Capital said that “In acquiring Cigna, Anthem will achieve greater than 20% accretion in the near-term and as much as 30% accretion when the full PBM savings are captured late this decade”. The billionaire investor also asserted that the Anthem-CIGNA deal is “highly likely to close”. The money manager also said “Despite our views, each arb spread is trading at 27% and 33% respectively, and each acquirer has seen their shares decline on average 16% despite the 15-30% accretion from the deal”.

Larry Robbins and his team attributed the share price weakness of the two acquirers (Anthem and Aetna) and the huge discrepancy between share prices and merger values to several factors:

  1. Risk aversion from traditional arb and event funds who have had very challenging conditions over the past 18 months, several of whom have liquidated;

  2. Time arbitrage, with the deals unable to close in calendar 2015, causing investors to feel they may sell today and come back another day;

  3. Concerns regarding the statements of political candidates during the election cycle that express populist concerns regarding the potential for market power coming from such consolidation; and

  4. Fear that they are heavily owned by hedge funds, including Glenview, who have had poor performance, and as such that those funds will be forced sellers and create better buying opportunities later.

Moreover, Glenview Capital also expressed its belief that the aforementioned companies represent attractive opportunities even if the mergers do not go through. The billionaire investor said the following in the letter:

“Take for example the Anthem and Cigna deal (illustratively, Aetna and Humana are in a similar situation). Anthem is trading at 11x 2017 standalone EPS (and <10x including the stand-alone earnings opportunity from its PBM). Cigna is trading at ~12x 2017 standalone EPS. Each company has projected a standalone EPS CAGR of 13-14% from 2015-2018. Should this transaction fail to receive anti-trust approval, we see 20-35% annualized returns in the names through the end of 2016. However, we do believe this transaction is highly likely to receive approval.”

Let’s now move on to a detailed look at how CIGNA has been traded lately by the entirety of the investors tracked by Insider Monkey.

How are hedge funds trading CIGNA Corporation (NYSE:CI)?

At Q4’s end, a total of 67 of the hedge funds tracked by Insider Monkey were bullish on this stock, a decline of 12% from one quarter earlier. With the smart money’s sentiment swirling, there exists a select group of noteworthy hedge fund managers who were increasing their stakes considerably (or had already accumulated large positions).

Of the funds tracked by Insider Monkey, the aforementioned Glenview Capital has the most valuable position in CIGNA Corporation (NYSE:CI), worth close to $1.02 billion, accounting for 5.8% of its total 13F portfolio. On Glenview Capital’s heels is D.E. Shaw & Co. L.P., founded by David E. Shaw, holding a $330.9 million position; the fund has 0.5% of its 13F portfolio invested in the stock. Remaining professional money managers that hold long positions include Thomas Steyer’s Farallon Capital, Richard S. Pzena’s Pzena Investment Management, and Richard Barrera’s Roystone Capital Partners.

Seeing as CIGNA Corporation (NYSE:CI) has faced a declination in interest from the aggregate hedge fund industry, logic holds that there was a specific group of fund managers who were dropping their entire stakes last quarter. At the top of the heap, Matthew Halbower’s Pentwater Capital Management dumped the largest stake of the “upper crust” of funds watched by Insider Monkey, worth an estimated $80.3 million in stock. Michael Messner’s fund, Seminole Capital, also sold off its stock, about $51.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 9 funds last quarter.

The concluding page of this article discusses the hedge fund activity in other companies that have market capitalizations similar to that of CIGNA Corporation.