The Health Care M&A Monthly: Aetna One-Ups WellPoint- Part II-

Largest Managed Care Deal Of The Year...So Far

Neither company has been shy about growth through acquisition.  Aetna has completed more than a dozen publicly announced transactions in the last decade, but its blockbuster deal was the acquisition of U.S. Healthcare for $8.9 billion in 1996.  That deal really gave Aetna the platform to grow the health insurance side of the business after selling off its property and casualty business in 1995. For its part, Coventry has completed more than two dozen acquisitions since 1999 for $3.6 billion, with the largest the $1.92 billion purchase of First Health Group in 2004.  With scale becoming increasingly important in the health insurance markets, we suspect Aetna is not done, even though it will have pro forma annual revenues of $50 billion.  

Scale does not come without costs, however, as the debt financing for the acquisition will take Aetna’s debt to total capital from 30% to 40%.  This has raised some alarm bells with credit analysts (not the equity analysts), but the concern would appear to be overblown and more of a “CYA” defensive move.  The market liked the news of the deal, sending Aetna’s shares up more than 5%, which is not common for an acquirer.  Another way to look at it is that Coventry’s shareholders left something on the table with just a 20% premium being paid by Aetna.  To be fair, the premium was actually about 38% since July 6, the day before WellPoint announced its purchase of Amerigroup.  The deal is expected to be modestly accretive in 2013, then accretive by $0.45 per share in 2014 and $0.90 per share in 2015, when cost synergies are projected to total $400 million annually.  

The Coventry acquisition will double Aetna’s Medicaid revenues and triple is Medicaid membership.  In addition, it will increase AET’s Medicaid footprint to 14 states, where over one-third of its enrollees are dual eligibles, including Kentucky, which has been a difficult Medicaid market and a state where Coventry was one of three winning bidders to serve the state’s Medicaid population.  Much of this is in anticipation of the expansion of the Medicaid program, something many governors are fighting even though in the first few years the federal government is paying 100% of the cost, which isn’t exactly true when you look at the changing eligibility requirements and services that will now be covered.
        
While it is true that government sponsored health care is expected to be the fastest growing segment in health insurance, we are still not quite sure how profitable it will be in the long run.  Making the assumption that real cuts in Medicaid and Medicare will occur, or at a minimum the rate of growth will have to be curtailed, it would seem that the managed care companies will be stuck in the middle.  If they do not receive enough money from the Feds, they will cut back on coverage or eligibility, making the Feds unhappy as well as the customer, who will not receive what has been promised to them.  This is especially true if Medicaid block grants become a reality on a national basis................Want to read more? Click here for a free trial to The Health Care M&A Information Source and download the current issue today