The deal spread for the $7.6 billion merger of Health Net (HNT) with Centene (CNC) - Get Report has widened as an investor report highlighting the political risk facing the deal has circulated the market.

The Health Net transaction, which cleared the Hart-Scott antitrust process in August and has other substantial approvals, remains subject to approval by the California Department of Insurance. The CDI held a hearing on the deal on Jan. 22 and the record for public comment was open until Jan. 29, but CDI has another 30 days in which to render a decision once the record on the insurance review is closed.

Centene has said that it has received all necessary approvals with the exception of California, which remains pending. The Jan. 22 public hearing with CDI was "informative and there were no surprises. It was conducted in a professional and respectful manner, and was part of what has been a fair and thorough process." The company said it was finalizing a mutual agreement and remains confident of a first-quarter close.

The deal spread widened from $1 earlier this week to $2.05, or 3.3%, on Wednesday. If the merger closed March 31, that spread represents an annualized return of 28%.

The primary risk for the deal is the approval by CDI commissioner David Jones, who has both stated dissatisfaction with the operations of health insurance companies in the state and also is running for California attorney general. Jones has been frustrated with unsuccessful attempts to win the CDI rate review powers from the legislature, in part due to political spending by the insurance industry, a risk arbitrageur said.

While the California Department of Managed Health Care has oversight over the larger health insurance deals pending, Cigna (CI) - Get Report / Anthem (ANTM) - Get Report and Humana (HUM) - Get Report / Aetna (AET) , the CDI does not. The CDI has sway over the Health Net transaction because the company is domiciled, as opposed to just licensed, in California.

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The risk is that Jones could outright reject the Health Net merger or require conditions that would make the deal uneconomical to Centene, the arbitrageur said. The CDI could attempt to make the companies agree to a voluntary rate review, which might be a deal killer, the arbitrageur said.

Next week Jones is expected to speak at the California Democratic State Convention, and Jones has used that platform as a bully pulpit in the past.

These issues were highlighted in a report out of the Value Investors Club, an organization of analysts pitching trading concepts. The report emphasizes Jones' political ambitions and recent acrimony with health insurers in the state.

There should not be an issue for the merger as the companies have no real Medicaid business overlap in California, and Centene has no commercial insurance business in the state, an arbitrageur said.

But the CDI could argue that parties in past insurance mergers have not held to promises made to get deal approval, the arbitrageur said.

The Value Investors' report on the merger also argues that the CDI could hold that Centene lacks the commercial insurance experience to maintain a competitive edge in the state.

Comment from Centene was not available at press time.