The Health Care M&A Monthly: Anthem and WellPoint Craft Largest Managed Care Deal Ever

On the last Monday in October, the Managed Care sector produced two of the largest deals to be announced in the past 10 years. Even news on the same day of the $48 billion merger of Bank of America (NYSE: BAC) and FleetBoston Financial Corp. (NYSE: FBF) could not take away from the fact that one of the two is the largest Managed Care merger ever announced. It is the kind of deal that redefines the landscape and sets the standard for all subsequent transactions.
The other deal, naturally smaller by comparison, is still the fourth-largest Managed Care deal in the past decade. More typical of recent deals, it seeks to secure a dominant position in a particular region. Once these deals close, one company will emerge as the dominant player on the national scene and the other as the dominant player in a particular region.
The chart on page 3 gives the top 20 deals in the Managed Care sector for the past decade. The year 2003 is notable not merely because of the largest deal, but because it has four of the largest deals in the 10-year period.
Anthem Buys WellPoint
In the largest Managed Care deal ever, presented as a merger of equals, Anthem (NYSE: ATH) announced it will pay $16.4 billion to acquire WellPoint Health Networks (NYSE: WLP).
Based in Indianapolis, Anthem currently provides managed care services to 12 million Blues plan members in nine states: Indiana, Kentucky, Ohio, Connecticut, New Hampshire, Colorado, Nevada, Maine and Virginia.
Starting out as a mutual insurance company, Anthem converted to a publicly traded corporation on November 2, 2001. It has grown by acquisition, buying up various franchises of the national Blue Cross and Blue Shield Association (BCBSA). Two years and a handful of days after going public, it proposed its biggest transaction.
On a trailing 12-month basis, ATH generated revenue of $16.5 billion and net income of $737 million.
Formed in 1992 as a for-profit subsidiary of Blue Cross of California, WellPoint Health Networks was the first Blues plan to convert to for-profit status, undertaking a recapitalization in May 1996.
WellPoint has diversified into a number of different geographic markets, acquiring Blues plans in Georgia, Missouri and, most recently, Wisconsin. Its $380 million acquisition of the Massachusetts Mutual’s group benefits organization in 1996, now operating as UNICARE, gave it specialty members across the country.
WLP offers a variety of HMO and PPO products in several markets. It currently serves 14 million medical members and 44 specialty members nationwide through its UNICARE subsidiary. It operates primarily in the California, Georgia, Missouri, Texas, Wisconsin and metropolitan Chicago markets. On a 12-month trailing basis,WLP earned $843.7 million on $19.4 billion in revenue.
Under terms of the deal, WLP shareholders are to receive $23.80 in cash and one share of ATH common stock for each WLP share. This yields a total transaction value of $16.4 billion. While the combined company is to be known as WellPoint, its headquarters will be consolidated in Indianapolis. Larry Glasscock, the CEO of Anthem, will become CEO of the combined company while his counterpart at WLP, Leonard Schaeffer, will become chairman of the board.
Accordingly, the price per enrollee is $1,170, price to revenue multiple is 0.95x and price to EBITDA is 11.4x. This deal offers WLP shareholders a 20% premium to the stock’s prior-day price.
This combination will create the nation’s largest managed care company with 26 million medical members, generating about $36 billion in pro forma revenue. As a result of this deal, fully 30 percent of the 88.3 million enrollees in the 41 Blue Cross and Blue Shield plans nationwide, spread over 13 states, will be under the control of the new WellPoint.
ATH shareholders did not exactly welcome the news: the company’s stock price sank from $77.26 the day before the announcement to $69.05 the day after. This drop set the scene for the shareholder class-action lawsuits that could be predicted to follow such a large transaction. Also, the rating agencies’ responses were mixed.
Getting to be the country’s largest managed care company carries certain advantages, especially when it has access to the valuable Blue Cross Blue Shield trademark, but are they enough to explain why they undertook this deal? Recently, both companies have suffered acquisition setbacks. In a bitter, contentious battle, WLP failed to acquire Maryland’s CareFirst BlueCross BlueShield for $1.3 billion. Anthem’s $190 million bid to acquire the Kansas Blues was ultimately foiled by that state’s AG and Supreme Court. One analyst quipped that they merged because they couldn’t find other acquisition candidates.
The new WellPoint will probably want to extend its first-place position with additional acquisitions. It is unlikely, however, that it will go on an immediate buying spree. Time—and money—will be needed both to integrate information systems and to shore up P/E ratios to satisfy shareholders. Even with the proposed "synergies," will there be much left over to pass on to consumers in the way of lower premiums, co-pays or formularies? How the new WellPoint handles these issues operationally and in terms of public relations may well affect its future ability to woo and buy any but the most distressed Blues plans.
The image of the 800-pound gorilla gatekeeper may well turn off potential acquisition and conversion candidates. New York’s WellChoice (NYSE: WC) will be the only other publicly traded Blues plan after this deal closes; some analysts suspect it is only a matter of time until the new WellPoint makes a bid. The conversion of Premera Blue Cross in Washington State to for-profit status is now being challenged on the basis that it would only make it an acquisition target for the new WellPoint. The ability to persuade other Blues plans to sign on will rest squarely on WellPoint’s ability to demonstrate cost-effective health care solutions for its customers, and the jury is still out.