The Health Care M&A Monthly: WellPoint Parries UnitedHealth, Buying WellChoice for $6.5 Billion

When UnitedHealth Group (NYSE: UNH) announced that it was buying PacifiCare Health Systems (NYSE: PHS) for $9.2 billion in July, we speculated that to shore up its dominant position, WellPoint (NYSE: WLP) would counter by acquiring New York’s WellChoice (NYSE: WC), the last independent, publicly-traded Blue Cross Blue Shield plan. A scant three months later, WLP negotiated a deal to buy WC for $6.5 billion in cash and stock.
WellPoint, formed through the $16.5 billion merger of WellPoint Health Networks and Anthem, Inc. last year, provides health benefits to 28.8 million members in 13 states, where it operates as an independent licensee of the Blue Cross and Blue Shield Association. Its managed care plans include commercial HMOs, PPOs and POS plans. Through its subsidiaries, it provides traditional indemnity plans and specialty products such as dental and vision insurance and pharmacy benefits management. On a trailing 12-month basis, WLP generated revenue of $34 billion, EBITDA of $3.4 billion and net income of $1.6 billion. WellChoice is a Blue Cross Blue Shield franchise that provides health insurance to 5 million members in New York and New Jersey through its two divisions: (1) commercial managed care and (2) other insurance products and services. On a trailing 12-month basis, the company generated revenue of $6.14 billion, EBITDA of $465 million and net income of $267 million.
Once a nonprofit, WellChoice went public in 2002 after a long and sometimes rocky road to conversion. As a result of the conversion, the New York Public Asset Fund (NYPAF) owns 52 million shares of WC common stock, or 62% of all shares outstanding. As noted in The New York Times, under legislation that was strongly supported by the head of the health worker’s union 1199/SEIU, much of the money held by the NYPAF has been dedicated to go into the paychecks of 1199 members, so getting the union to come on board with this deal speaks highly of WLP’s negotiating prowess.
Returning to the current transaction, each share of WC common stock is to be exchanged for $38.25 in cash and WLP stock. The exchange ratio is 0.5191 shares of WLP stock for each share of WC stock.
Accordingly, this transaction values WC stock at about $77 per share and offers WC shareholders a 9.1% premium over its prior-day price. The price per member is $1,300, the price to revenue (P/R) multiple is 1.1x, and the price to EBITDA multiple is nearly 14x.
Apparently, NYPAF had shot down two earlier proposals, one beginning at $70 per share, due to pricing being too low or terms too restrictive, before the $77 per share offer was finally accepted. Given the fact that the value of WC stock has more than tripled since going public, the NYPAF and the union can be pretty happy with the outcome of this deal.
As a result of this transaction, WellPoint will serve over 33 million medical members as a Blue Cross or Blue Shield licensee in 14 states and through its HealthLink and UniCare subsidiaries. In effect, one out of every four Blue Cross Blue Shield members in the country will come under WLP’s umbrella. Strategically, this deal brings WellPoint into more direct competition with UnitedHealth in the New York City metropolitan area where UNH acquired Oxford Health Plans last year for $4.9 billion.
When Larry Glasscock, CEO of WLP, took his first Blue Cross job in 1993, there were 69 Blue Cross and Blue Shield plans; once this deal closes, there will be 39. What is left for him to buy? Both the Kansas and the Maryland Blues, which sought to convert to for-profit status and were rebuffed, appear to be out of the picture for the time being. The Blues in Illinois, North Carolina and Texas are strong financially, and so have no motivation to convert. WLP will most likely have to look for growth internally and through acquisitions of lateral business lines. As consumer-driven health plans penetrate the market, WLP will probably look for deals that complement its platform acquisition of Lumenos in May 2005 for $185 million, a deal which not coincidentally matched rival UNH’s $305 million acquisition of Definity Health in December 2004.