The Health Care M&A Monthly: Managed Care Turns Around--
Deal And Dollar Volume Jump In Second Half Of Year
Back in May we observed that one of the first victims of health care reform was the Managed Care sector, at least as measured by merger and acquisition activity. At that point, the industry was eking out just one deal per month, and two-thirds of those deals involved the acquisition of ancillary businesses. Uncertainty over the hazily emerging reimbursement landscape and the inability to confidently predict cash flows—or calculate valuations—effectively put a lid on M&A activity in this sector. Instead, managed care companies acquired businesses outside their core competencies, in e-Health for example, to diversify their sources of revenue and secure future growth.
That picture accurately describes the first half of 2011, but a different one has emerged in the second half. From January through the end of June, a total of five deals were announced in the Managed Care sector worth a combined total of $1.69 billion. But from July through the end of October, the deal volume doubled in size to 10 transactions worth a combined total of $4.1 billion. Finally, seven of those 10 deals involve hard-core managed care companies, such as Medicare Advantage plans, while the remaining three involve ancillary services such as third-party administrators and a diagnostic imaging preferred provider organization. During the first half of 2011, the transactions involved 654,000 medical members and 595,000 ancillary services members, while during the second half the deals involved 1,989,000 medical members and 4.8 million ancillary services members. And we still have two more months left in the year. Clearly, deal makers are feeling more comfortable in their M&A endeavors.
Managed Care M&A In October 2011
The month of October alone produced five deals, or half the deal volume for the second half of the 2011 so far. They are worth a combined $3.885 billion and affect 870,000 medical members and 800,000 ancillary services members. The largest of these is Cigna Corp.’s (NYSE: CI) $3.8 billion acquisition of HealthSpring (NYSE: HS), a managed care organization that offers Medicare Advantage plans to 340,000 members and allied services to 800,000 other members in 11 states. This acquisition, which offers HS shareholders a 37% premium to the stock’s prior-day price, is valued at 0.86x revenue and 8.4x EBITDA. Under terms of the transaction, new equity is to account for 20% of the deal’s financing; additional debt issuance and internal cash resources are to provide the remainder. This transaction immediately enlarges Cigna’s Medicare Advantage business.
In the next largest deal, Amerigroup (NYSE: AGP) is buying Health Plus from Lutheran HealthCare for $85.0 million. One of New York’s largest Medicaid managed care companies, Health Plus serves 320,000 members in New York’s Medicaid, Family Health Plus and Child Plus programs, as well as Medicare. This acquisition expands AGP’s coverage in New York State, which has the country’s second largest Medicaid population. The deal is expected to be slightly dilutive to AGP’s earnings in 2012, due to integration and other one-time costs, but accretive starting in 2013. The proceeds from the sale will help create an endowment for Lutheran HealthCare, strengthening the mission to serve its patient base...Want to read more? Click here for a free trial to The Health Care M&A Monthly and download the current issue today