October 21, 2021 | Health Care | North America | Ended
UnitedHealth Group’s (“UNH”) pending $8.6bn acquisition of Change Healthcare (“Change”) exhibits the widest risk arbitrage spread and one of the lowest implied probabilities of completion in the global risk arbitrage universe. The deal has been under review at the Department of Justice (“DoJ”) since January 2021 and received a second request in March; since then, rumours have circulated that the regulator could litigate to block the deal. Specific concerns focus on anticompetitive conflicts of interests that would result from UNH, as the US’ largest insurer, accessing Change’s expansive proprietary dataset and if the acquisition will allow UNH to extend its already considerable market power to other parts of the healthcare ecosystem. Meanwhile the changing political mood in Washington on antitrust reform appears to be spurring on enforcers to protect competition in critically important healthcare and technology markets, which could spell further trouble for the deal. In this report, we speak to antitrust lawyers, industry experts, and UNH to evaluate the main antitrust risks associated with UNH owning Change and whether the DoJ will sue to stop the deal. We also examine potential remedies that would allow UNH to avoid litigation along with the company’s willingness to defend the acquisition in court. We calculate Change’s fair standalone value and where its shares could revert to in the event of litigation and termination, considering trading and operating performances of Change and its peers since deal announcement. Finally, we consider the overweighted hedge fund ownership and the extent to which termination will cause an expected immediate knee-jerk reaction with Change dislocating from its fundamental value.
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