One year ago, in our June 2002 issue, the leadoff story predicted that having gone public and turned its finances around, the Wisconsin Blues organization, operating as Cobalt Corporation (NYSE: CBZ), would probably become an acquisition target. That story also named WellPoint Health Networks (NYSE: WLP) as one of the two most likely suitors.
If we may toot our own horn, our choice for Deal of the Month validates that prediction, indicating how inexorable the drive toward consolidation is among Blue Cross and Blue Shield plans. Still stinging from its defeat in the battle to acquire Maryland’s CareFirst BlueCross BlueShield, WellPoint announced an offer to buy Cobalt Corp. for $906 million in cash and stock.
WellPoint operates Blues plans in California, Georgia and Missouri. It also has additional operations in Massachusetts, Texas and the greater Chicago area, generally under the UNICARE name. Its total 13.5 million medical members include 10.3 million in Blues plans. WLP also has 48.1 million specialty members in dental, vision and worker’s comp plans, among others. On a trailing 12-month basis, WLP generated revenue of $18.2 billion, EBITDA of $1.36 billion and net income of $750 million.
WellPoint was formed in 1992 for the express purpose of owning and operating the managed care operations of Blue Cross of California (BCC). The company went public on January 27, 1993, and by February, all the managed care operations of BCC were irrevocably transferred to WellPoint.
During 1996, the company undertook a recapitalization to fulfill WellPoint’s public benefit obligation to the state of California in connection with its acquisition of BCC’s managed care assets. This recapitalization ended up funding two foundations.
WellPoint’s example thus set a pattern of conversion and acquisition that other companies would repeat to acquire Blues operations across the country. This pattern was substantially followed in the creation of RightChoice Managed Care in Missouri and Cobalt Corp. in Wisconsin.
Buoyed by its success in the competitive California market, WLP set its sights on building up national coverage. To that end, it has made a number of transactions over the past eight years (see Chart on p. 3), some small, some not so small.
Notably, it acquired Cerulean Companies, parent to the Georgia Blues, for $700 million. In the deal to acquire Cerulean’s membership of 1.7 million enrollees, WLP paid about $417 per member, or 0.55x revenue. WLP’s next major purchase was RightChoice Managed Care, the publicly traded Missouri Blues plan with 2.8 million members, for $1.3 billion, valued at $462 per member or 1.13x revenue.
Most recently, WLP sought to acquire CareFirst BlueCross BlueShield for $1.37 billion. With 3.1 million members in Maryland, Delaware and the District of Columbia, that deal was valued at $440 per member. As reported here, however, that proposal finally bombed due to opposition from Maryland’s insurance commissioner and others. Never one to linger over failure, WellPoint approached Cobalt Corp. in April, as the deal to acquire CareFirst was spiraling down the drain.
Cobalt Corp., a franchisee of the national Blue Cross Blue Shield Association, serves 809,000 medical members through a variety of managed care products, including HMO, PPO and POS plans.
In a deal that was announced December 22, 2000 and closed March 31, 2001, United Wisconsin Services, which then traded on the New York Stock Exchange under the ticker UWZ, acquired Blue Cross & Blue Shield United of Wisconsin (BCBSUW) for $118 million in cash and stock. At the time, BCBSUW was 46% owned by UWZ. After BCBSUW merged, in effect, with its UWZ parent, the name was changed to Cobalt Corp. Pre-merger, BCBSUW had been operating at a loss; for the nine months ended September 30, 2000, it had lost $41 million on revenue of $470 million. In fact, for the three years to December 31, 2001, BCBSUW lost about $54 million, half of which was from its Medicare risk business.
As part of that deal, UWZ issued 31.3 million shares of stock to the Wisconsin United for Health Foundation, which then owned 77.5% of the company.
Changes have occurred since. When BCBSUW merged with UWZ, membership in BCBSUW was about 630,000, but has now increased by 28% to over 800,000. For the quarter ended March 31, 2003, CBZ generated $408.6 million in revenue, $18.8 million in EBITDA and $11.1 million in net income. Annualized, the relevant figures are $1.6 billion in revenue and $75.2 million in EBITDA. At the end of that quarter, CBZ had assets worth $900 million.
Cobalt sold off noncore assets: in April 2002, it divested Innovative Resource Group, a health care management company specializing in behavioral health and medical consulting, to APS Healthcare of Bethesda, Maryland for $27 million in cash and notes.
Under terms of WLP’s proposal, CBZ shareholders are to receive $10.25 in cash and 0.1233 shares of WLP stock for each CBZ share they hold. This makes a grand total of $906 million. Accordingly, the relevant acquisition multiples are $1,120 per member, 0.57x revenue and 12.1x EBITDA.
Under terms of the deal, the Wisconsin United for Health Foundation, which now owns about 60% of CBZ shares outstanding, will receive $256 million in cash and 3.1 million shares of WLP stock. The Foundation likes what it sees and has voted in favor of the deal.
The deal offers shareholders a 14% premium over the stock’s closing price the day before the announcement was made. Management’s statement that this is a “tremendous” offer for shareholders may be guilty of some hyperbole, but then they see a lot of potential upside in this deal. Cobalt, already the market leader in Wisconsin, has a share only in the high teens where many Blues command from 30% to 60% of their markets. But finances have clearly improved as the company sold off noncore business lines.
In shifting its attention from the East Coast to the Midwest, WLP may be attempting to go toe-to-toe with Anthem, Inc. (NYSE: ATH) in Anthem’s own backyard. ATH’s plans cluster on the East Coast and in the Midwest. With CBZ in its stable of managed care plans, WLP will have 14.3 members, 11.1 million of them in Blues plans as compared with ATH, which currently covers 11.5 million Blues members.
The deal would cement WLP’s position as the country’s second-largest health insurer. It would close in on UnitedHealth Group (NYSE: UNH), which has 17.6 million medical members, and increase the distance between itself and Aetna (NYSE: AET), which has approximately 13 million medical members.
The only question remaining is, Will this deal actually close? Note that in the chart above, three of the 11 deals that WLP previously announced, or 27% of the total, ultimately did not close. We will keep you abreast of developments in upcoming issues.