WellPoint Buys More Medicaid Exposure

By Stephen D. Simpson, CFA | July 08, 2012 AAA

Funny how a Supreme Court ruling can change strategic priorities. Not all that long after management stated that it had no plans to expand its Medicaid business, WellPoint (NYSE:WLP) announced Monday that it was acquiring Medicaid managed care company Amerigroup (NYSE:AGP) in a nearly $5 billion deal. Not only does this deal look as though it can be very accretive over time (even with a 43% premium), but it arguably represents a best-of-breed buyout in a sector that could soon see more activity.

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The Deal to Come
WellPoint announced Monday morning that it would acquire Amerigroup in a deal worth a total of $4.9 billion. The equity side of the deal works out to a $92 per share cash offer for Amerigroup shareholders, a 43% premium to Friday's close.

WellPoint is definitely paying a premium for the deal, but deals like this tend to carry above-average synergies for the buyer. What's more, the entire sector has been weighed down by worries tied to healthcare reform and it was going to take a premium to get a deal done.

SEE: Analyzing An Acquisition Announcement

What WellPoint Is Getting
In buying Amerigroup, WellPoint is buying arguably the highest-quality Medicaid platform. Combined, the companies will have the largest Medicaid platform, with about 4.5 million members in 19 states. Although Medicaid has not always been an attractive market for the major health insurance companies like WellPoint and UnitedHealth (NYSE:UNH), the provisions of the Affordable Care Act that expand and subsidize Medicaid coverage should make it a more compelling business in the years to come.

SEE: Medicaid Vs. Long-Term Care Insurance

Is This the Beginning?
Growth by acquisition has long been a staple of the health insurance, and the new regulations introduced by the Affordable Care Act will likely spur even more consolidation. There are major economies of scale when it comes to processing and paying claims. Furthermore, regulatory minimums for medical claims payouts will make it increasingly difficult for the small players to compete effectively.

Looking more specifically at the Medicaid landscape, this deal probably puts Centene (NYSE:CNC), Molina (NYSE:MOH), and WellCare (NYSE:WCG) into play, or at least in the mind of Wall Street. Although antitrust concerns could start to grow, it would make sense for UnitedHealth, Aetna (NYSE:AET) and Humana (NYSE:HUM) to kick the tires on deals.

SEE: Biggest Merger And Acquisition Disasters

The Bottom Line
With the 1-800 Contacts deal done and this large deal on the docket, it would seem that WellPoint management has enough on its plate for the time being. That said, the low-rate environment makes debt cheap to come by today and there are significant potential synergies in this deal - Amerigroup could add 10% or more to the 2015 earnings outlook for WellPoint. With that sort of IRR, WellPoint may not be completely done dealing yet, particularly if more attractive options emerge in the retail/consumer/over-the-counter space.

Even with the market reacting well to this deal, WellPoint shares do not look expensive. Furthermore, even if new healthcare regulation caps WellPoint's ability to improve returns on capital, these shares remain an interesting growth-value proposition today.

At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.

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