U.S. health insurer Aetna Inc. (AET) signed an agreement to acquire Coventry Health Care Inc. (CVH) for $7.3 billion. The purchase consideration also included takeover of the latter's debt. Per the agreement, shareholders of Coventry will get $27.30 in cash and 0.3885 Aetna common shares for each Coventry share, or $42.08 per share, based on the closing price of Aetna common shares on Friday, August 17, 2012.
Aetna is expected to issue $2.5 billion of debt and use the existing cash in hand to finance the deal. Though this will increase the company's leverage ratio, it is expected to decline over time.
The deal is likely to close by mid 2013. Excluding transaction and integration costs, the transaction is anticipated to be modestly accretive to Aetna's operating earnings in 2013. Moreover, it may add 45 cents per share to its operating earnings in 2014 and 90 cents per share in 2015.
Coventry is a niche player in the Medicare Advantage ("MA") and Medicare Part D programs, as well as in Medicaid managed care plans, group and individual health insurance. It also provides coverage for specialty services, such as workers' compensation and network rental services. The long-term strategic advantage of the deal is that it will allow Aetna to enhance its revenue share in the Government business (MA and Medicare Part D) to 30% from the present 23%.
Last year in October, Aetna closed its acquisition of Genworth's Medigap business for $290 million.
The health insurance sector has been witnessing an increasing interest in the Medicare Advantage space for quite a long time. An MA plan is a government program, but is offered by commercial insurers to Medicare beneficiaries.
As baby boomers hit their retirement ages, they will opt for managed care plans. Health Insurers are thus planning to acquire providers of managed care plans to the seniors that in turn will help it generate higher revenues. Also, managed-care plans for Medicare are expected to generate incremental revenue of $10 billion by 2015, which would make such acquisitions valuable.
Carriers in the health insurance sector are competing with each other to win MA market share and the fastest way of doing this is to plan for such acquisitions. The recent deals show that the pace of merger and acquisition activity in this arena is quite high.
UnitedHealth Group Inc. (UNH) acquired XLHealth Corp, a sponsor of Medicare Advantage health plans, and also bought Brentwood based Inspiris to increase its Medicare Advantage business.
Similarly, Humana Inc. (HUM) is set to acquire Arcadian Management Services and MD Care. Both deals are expected to close before the end of 2012 and enhance Humana's MA membership by 4.1% upon completion.
On October 1, 2011, Aetna closed its acquisition of Genworth's Medigap business for $290 million.
In addition, WellPoint Inc. (WLP), another big health insurer, bought CareMore Health Group.