--Aetna to pay $5.7 billion in cash-and-stock deal
--Deal will increase Aetna's presence in government-financed
health care
--Coventry has more than 5 million total members
Aetna Inc. (AET) continued the managed-care sector's acquisition
streak Monday by announcing plans to buy Coventry Health Care Inc.
(CVH) in a $5.7 billion cash-and-stock deal that will boost Aetna's
presence in government-financed health care.
The transaction also will lift Hartford-based Aetna's commercial
membership. Coventry--which has struggled recently with high costs
in Kentucky's Medicaid market--has more than five million members
overall, including people who get health coverage through their
employers, through the Medicare program for the elderly and through
the Medicaid plan for the poor.
"Integrating Coventry into Aetna will complement our strategy to
expand our core insurance business, increase our presence in the
fast-growing government sector and expand our relationships with
providers in local geographies," Mark T. Bertolini, Aetna's chief
executive, said in a release.
Aetna said the deal will solidify the company's position as the
third-largest managed-care firm by membership, behind UnitedHealth
Group Inc. (UNH) and WellPoint Inc. (WLP), with 22 million combined
medical members as of June 30.
Meantime, the deal also will broaden Aetna's focus,
traditionally on commercial insurance, more toward government
plans. Based on 2012 membership numbers, a combined Aetna and
Coventry would get more than 30% revenue from government plans, up
from Aetna's current 23% tally.
"We think diversification is incredibly important as we head
into health-care reform," Mr. Bertolini said on a conference
call.
Big health insurers have been busy acquirers lately as they bulk
up their exposure to government-based health plans. Private
insurers' Medicare businesses are growing as baby boomers age;
meanwhile, their Medicaid businesses are expanding as states look
for help restraining costs. Medicaid also is set to grow under the
coverage-expanding U.S. health-care overhaul law.
That law has measures that are expected to pressure profit
margins, such as requirements to cover people with pre-existing
conditions, which could make managing the business more challenging
for small and mid-sized insurers. "I think the scale matters now,"
Allen F. Wise, Coventry's chief executive, said on the conference
call.
WellPoint last month agreed to buy Medicaid insurer Amerigroup
Corp. (AGP) for $4.46 billion, and Cigna Corp. (CI) bought
Medicare-focused insurer HealthSpring for $3.8 billion early this
year. Humana Inc. (HUM), WellPoint and UnitedHealth all have made
smaller deals to boost their Medicare operations.
The latest deal values Coventry at $42.08 a share, based on
Aetna's closing price Friday, and represents a 20% premium to
Coventry's price after Friday's close. Aetna plans to finance the
deal--which it valued at $7.3 billion including Coventry
debt--through a mix of cash and $2.5 billion of new debt and
commercial paper.
Coventry stockholders will receive $27.30 in cash and 0.3885
Aetna common shares for each Coventry share. Coventry shares surged
18.9% to $41.54 in recent trading Monday, while Aetna shares rose
4.2% to $39.62. Based on the deal's terms and Aetna's recent price,
Coventry shares are worth $42.69 each.
Shares of some Medicaid-focused insurers slipped because a big
potential buyer--Aetna--has turned its focus elsewhere. Centene
Corp. (CNC) fell 6.4% while Molina Healthcare Inc. (MOH) declined
1.9% and WellCare Health Plans Inc. (WCG) slid 2.5%. Shares of all
three firms surged after WellPoint announced plans to buy
Amerigroup on hopes they could be next in line.
Aetna and Coventry expect their deal to close in mid-2013
pending approval from regulators and Coventry shareholders.
"We believe this transaction makes sense for both Aetna and
Coventry," Wells Fargo analyst Peter Costa said in a note to
investors. "Coventry adds to several of Aetna's targeted growth
areas," he said.
Excluding transaction and integration costs, Aetna said the deal
will add "modestly" to its per-share operating earnings in 2013,
boost its 2014 numbers by 45 cents and increase 2015 earnings by 90
cents. Aetna also said it expects annual deal-related savings of
$400 million in 2015.
Mr. Bertolini highlighted the way the deal sets his company up
for 2014, when major provisions from the health-care law, such as
state-based exchanges where people can buy coverage, are expected
to begin. In a market where people can move freely from one type of
coverage to another, a diversified portfolio "is going to be very
important," he said.
Bethesda, Md.-based Coventry has nearly four million medical
members and 1.5 million people on Medicare prescription-drug plans.
Most of the company's medical members are in its commercial
insurance business, but Coventry has a growing business for
Medicare Advantage plans and Medicaid plans.
Coventry's Medicaid business became significantly larger last
year when the company became one of three to win contracts to serve
Kentucky's Medicaid population. That business has proved costly
after Coventry was surprised by high health-care costs that
overwhelmed incoming revenue from the state. The company last month
cited progress in both securing more revenue from Kentucky and
getting a better handle on costs.
Aetna Chief Financial Officer Joseph M. Zubretsky said on the
call that Coventry has a "solid plan" to fix its Kentucky
problems.
Aetna--which has talked down the idea of buying Medicaid
insurers, citing high prices--has been trying to grow its own
Medicaid business from within. The company hit a setback this year
when it appeared to win a contract in Ohio, but Aetna had the new
business taken away after successful protests from other firms. An
Ohio court last week dismissed a lawsuit Aetna filed as part of its
effort to win the business.
--Sharon Terlep, Anupreeta Das and Saabira Chaudhuri contributed
to this article.
Write to Jon Kamp at jon.kamp@dowjones.com
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