The Health Care M&A Monthly: UnitedHealth Group Offers $9.2 Billion to Buy PacifiCare

To become the country’s largest manager of Medicare plans and grow its West Coast business, UnitedHealth Group (NYSE: UNH) is acquiring PacifiCare Health Systems (NYSE: PHS). In consummating what is the second-largest managed care deal ever nnounced, UnitedHealth will secure its position as the largest managed care company in terms of annual revenue.
Based in Minnesota, UnitedHealth Group is one of the nation’s largest health care insurers. Through its various plans and programs, it serves approximately 55 million individuals nationwide. On a trailing 12-month basis, UNH generated revenue of $40 billion, EBITDA of $5 billion and net income of $2.8 billion.
UnitedHealth has been an active acquirer, averaging more than two deals a year for the past several years. A select acquisition history for both UNH and PHS appears on page 4.
Recently, UNH has been vying for the title of top health care insurer with WellPoint (NYSE: WLP), which emerged last year from the $16.5 billion merger of WellPoint and Anthem. UNH countered that deal with its own, the $4.9 billion acquisition of Oxford Health Plans.
Based in California, PacifiCare provides managed care services to 3.3 million HMO enrollees and specialty services to 10.4 million members through PBM, dental and vision plans, principally in the western United States. It is also one of the biggest private providers of health plans to Medicare. Apart from two deals last year, PHS made most of its acquisitions during the 1990s. On a trailing 12-month basis, PHS generated revenue of $12.75 billion, EBITDA of $652 million and net income of $322 million.
Under terms of the agreement, PHS shareholders will receive 1.1 shares of UNH stock and $21.50 in cash for each share of PHS common stock they own. As a result, UNH will pay out $2.2 billion in cash and issue approximately 111.6 million shares of stock currently worth $5.9 billion. By adding $1.1 billion in the assumption of PHS’ long-term debt, the net purchase price rises to $9.2 billion. That price makes this the second-largest Managed Care deal ever, after last year’s $16.5 billion Anthem-WellPoint deal and ahead of the $8.9 billion Aetna-U.S. Healthcare deal nine years ago.
The price-to-revenue (P/R) multiple in this deal is 0.72x and the price-to-EBITDA multiple 14.1x. The raw price per member is $672. However, based on the percentage of revenue that each segment contributes to PHS’ overall revenue, the price per HMO enrollee works out to approximately $2,600 while the price per specialty plan enrollee is $58.
This deal creates a company with 69 million total members and $53 billion in annual revenue, compared with WellPoint’s $27.3 billion in annualized revenue and 27.7 million members. This transaction will confer on UNH all those benefits that go along with being king of the hill.
The only hurdle this deal might encounter is opposition from California’s Attorney General Garamendi, who held the Anthem-WellPoint deal hostage until he could extract some further concessions for the state. Even so, WLP’s history of dealings with the AG’s office ought to provide UNH with a map for navigating that legal minefield. Morgan Stanley served as an advisor to PacifiCare.
News of this deal has bred speculation about more consolidation and dealmaking in the Managed Care sector, some of it admittedly little more than gossip. One proposal has Aetna (NYSE: AET) buying Health Net (NYSE: HNT), which has a presence in the Medicare Advantage market in AET’s home state of Connecticut. Aetna, however, has denied such a move. Another idea circulating in the press, and one easier to swallow, is that WellPoint will eventually buy Wellchoice (NYSE: WC), the New York Blues plan that recently went public. Given WellPoint’s penchant for buying Blue Cross Blue Shield plans, this is more likely a case of when, rather than if.