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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

Related Articles
  1. Stock Analysis

    Analyzing Home Depot's Return on Equity (ROE)

    Discover what Home Depot's return on equity (ROE) ratio says about the performance of the company and how it relates to historical averages and industry trends.
  2. Investing

    Asset Manager Ethics: Acting With Competence and Diligence

    Managers must make investment decisions based on their personal investment process, which in turn should be based on solid research and due diligence.
  3. Forex Education

    Understanding The Income Statement

    Learn how to use revenue and expenses, among other factors, to break down and analyze a company.
  4. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  5. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  6. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  7. Stock Analysis

    The Biggest Risks of Investing in Pfizer Stock

    Learn the biggest potential risks that may affect the price of Pfizer's stock, complete with a fundamental analysis and review of other external factors.
  8. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  9. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  10. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  1. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  2. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  3. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  4. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>
  5. How do I read and analyze an income statement?

    The income statement, also known as the profit and loss (P&L) statement, is the financial statement that depicts the ... Read Full Answer >>
  6. Can working capital be too high?

    A company's working capital ratio can be too high in the sense that an excessively high ratio is generally considered an ... Read Full Answer >>

You May Also Like

Trading Center