The Health Care M&A Monthly: UnitedHealth Group Buys Oxford Health Plan for $4.9 Billion

Rumors in the M&A market often contain a grain of truth. Last month, for example, we wrote that New York’s newly public WellChoice (NYSE: WC) was said to be in negotiations to buy Oxford Health Plans (NYSE: OHP) in an all-stock deal. WC admitted to holding talks only after the two companies decided to walk away from the deal.
Far from dampening the desire to speculate about deals, the lack of concrete information usually fires the imagination of the punditry, and this case was no different. The media abounded with estimates about price (these pages calculated $5.1 billion), concerns over antitrust rules and scenarios for strategic fit. In the babble of voices, one analyst at Fitch Ratings, Doug Meyer, may have understated the case when he said, "Don’t count UnitedHealth out."
Four days after WellChoice’s announcement of a no-go, UnitedHealth Group (NYSE: UNH) stepped in with a $4.9 billion offer to buy Oxford. It appears that UNH is not prepared to sit quietly on the sidelines as Anthem (NYSE: ATH) and WellPoint Health Networks (NYSE: WLP) rush to capture the title of the nation’s largest MCO.
Until the Anthem-WellPoint deal closes, Minnesota-based UNH is still the country’s largest health insurer with 20.2 million members. On a trailing 12-month basis, UNH generated revenue of $29 billion, EBITDA of $3 billion and net income of $1.8 billion.
An avid acquirer, UNH recently bolstered its East Coast operations in February with the $2.95 billion acquisition of Mid Atlantic Medical Services (NYSE: MME) and its 2 million members. What UNH found attractive in that deal was MME’s roster of big clients, which includes Sears, Roebuck and Co., Target Corp., Verizon and Wachovia Corp.
Based in Trumbull, Connecticut, Oxford Health Plans currently serves 1.5 million plan enrollees in the New York City metropolitan area, including neighboring Connecticut and New Jersey. On a trailing 12-month basis, OHP generated revenue of $5.45 billion, EBITDA of $633 million and net income of $352 million.
It was not always so rosy. In the last decade Oxford had ambitions of becoming a national player, and had even acquired operations in Florida, New Hampshire and Pennsylvania. But OHP seriously stumbled in October 1997 when it announced that due to billing mistakes and delays in processing claims, it would generate a loss. That caused the stock to lose 67% of its value in one day. After management cut costs (but not premiums) and sold off unprofitable businesses (the Florida, New Hampshire and Pennsylvania plans all went in 1998 along with the New Jersey Medicaid business), the company started its long and steady climb back to financial health.
Under terms of the deal, OHP shareholders are to receive 0.6357 shares of UNH stock and $16.17 in cash for each share of OHP common stock they hold. UNH would end up issuing about 34,773,000 million shares of its stock and pay out $1.4 billion in cash. This works out to a purchase price of approximately $4.9 billion.
This price implies a price to revenue (P/R) multiple of 0.9x, price to EBITDA of 7.75x and price per enrollee of $3,267. It further represents a 14% premium to the closing price of OHP stock the day before the deal was announced. Apparently Oxford’s board liked the cash component in UNH’s deal better than the all-stock consideration in the proposal by WellChoice, a company with scant history in the public markets.
UnitedHealth’s primary interest in seeing this deal done is to strengthen the company’s position in the New York metropolitan market, one of the country’s densest and potentially most profitable. The increased capacity from the Oxford acquisition would help UNH provide a broader range of services to the 43 large, multisite employers based in the tristate area that UNH already serves. And with 90 Fortune 500 companies headquartered in the region, UNH will doubtlessly seek to parlay its expertise with large employer groups into new contracts.
Any deal this big naturally comes with a slew of advisors and bankers. UNH was advised by J.P. Morgan Chase & Co., Morgan Stanley, Citigroup, Inc. and Bank of America Corp., while Skadden Arps Slate Meagher & Flom LLP and Dorsey & Whitney LLP provided legal counsel. On Oxford’s team, legal counsel was provided by Sullivan & Cromwell LLP while Goldman Sachs & Co. acted as financial advisor.
This merger will put WellChoice, Aetna (NYSE: AET) and Cigna Corp. (NYSE: CI) on the defensive in the Northeast. New enrollment has largely stalled for these companies, so one of the few ways left to bulk up is through the acquisition of other plans. This deal may help drive home the logic of buy, or be bought.
On a national scale, by closing the enrollment gap with soon-to-be number one Anthem-WellPoint, UnitedHealth has signaled its willingness to make acquisitions so it can enjoy the benefits conferred by being number one.