The Health Care M&A Monthly: Aetna One-Ups WellPoint-
Largest Managed Care Deal Of The Year...So Far
Timing is everything. Last month we wrote a feature story on the managed care sector, talking about how M&A activity was finally on the rise after slumping through the Great Recession and the uncertainty surrounding health care reform. The dollar volume of transactions in 2011 was double that of 2010, which in turn was four times greater than in 2009, which was the least active year in more than a decade. This year was off to a relatively slow start, with just $1.2 billion in announced deals in the first six months. My, how a few weeks can change the momentum.
We already reported on WellPoint’s (NYSE: WLP) acquisition of Amerigroup Corporation (NYSE: AGP) in July for $4.9 billion, making it the sixth largest sector transaction in history (actually tied with the purchase of Oxford Health Plans in 2004). Now, with Aetna’s (NYSE: AET) recently announced acquisition of Coventry Health Care (NYSE: CVH) for $7.3 billion, 2012 is shaping up to be the most active year (measured in dollars) since 2003 when Anthem purchased WellPoint for $16.5 billion, but kept the WellPoint name. So far this year, managed care deal volume is in excess of $13 billion, and apparently growing. Or will it?
Before getting into some of the more general M&A topics with regard to managed care, let’s first take a look at the facts of the Coventry deal. Based on Aetna’s share price when the acquisition was announced, CVH shareholders will be receiving $42.08 per share, representing a 20% premium to the prior-day close. They will receive $27.30 in cash and 0.3885 AET common shares for each CVH share. Aetna will also be assuming nearly $1.7 billion of debt, but we have not netted the $1.6 billion of cash on CHH’s balance sheet against that.
For this princely sum, Aetna will be acquiring about 2.82 million commercial members, 930,000 covered lives under Medicaid plans and 250,000 under Medicare plans. In addition, CVH provides prescription drug coverage to an additional 1.5 million Medicare enrollees. Excluding the 1.5 million Medicare Part D enrollees, the price comes to just over $1,800 per enrollee, which was about the average in 2007 and early 2008 before the market tanked. It was also the same price per enrollee that WellPoint paid for Amerigroup.
On the financial side, Aetna is paying 0.55x revenues and 7.9x EBITDA based on trailing 12 month figures of $13.3 billion and $923 million, respectively. While this was a slightly lower multiple of revenues than in the Amerigroup deal, the EBITDA multiple was about half. Now, if you make the “generally accepted assumption” that both deals were done for the Medicaid and Medicare business, then Amerigroup would be considered the more attractive of the two because that was its business. With Coventry, it was 30% of its enrollees, plus the Medicare Part D enrollees. However, Coventry is the more profitable of the two targets, and almost twice as large, with a 7% EBITDA margin compared with about 4% for Amerigroup, which is similar to the other two remaining large Medicaid managed care companies, Molina Healthcare (NYSE: MOH) and Centene Corporation (NYSE: CNC), but more on them later.............Want to read more? Click here for a free trial to The Health Care M&A Information Source and download the current issue today