* To pay $27.30 in cash, 0.3885 share for each Coventry
* Deal at 20.4 pct premium to Coventry's Friday close
* Deal to add modestly to Aetna's 2013 operating earnings
* Aetna shares up 5.6 pct; Coventry up 20.3 percent
By Debra Sherman
CHICAGO, Aug 20 Health insurer Aetna Inc
said on Monday that it would buy rival Coventry Health Care Inc
for $5.6 billion to increase its share of the
fast-growing, U.S. government-backed Medicare and Medicaid
The purchase, which will add more than 5 million members to
Aetna's customer ranks and double its business administering the
government's Medicaid health plan for the poor, comes just weeks
after rival WellPoint Inc struck a deal to buy Medicaid
specialist Amerigroup Corp.
"It's about scale - getting critical mass in Medicare and
Medicaid, gaining negotiating power with hospitals and other
providers," said Jeff Jonas, an analyst with Gabelli Health and
Wellness Trust Mutual Fund. "After several other well-received
deals ... Aetna was getting left behind as one of the smaller
players. Not anymore."
Bankers and investors see the wave of health insurer
consolidation accelerating further as the United States moves to
implement President Barack Obama's healthcare overhaul.
But the law still faces significant challenges. Republican
presidential candidate Mitt Romney has vowed to roll back the
Affordable Care Act if elected in November, and Republican state
leaders could make it difficult to implement many provisions of
The U.S. health reform law aims to expand coverage to 16
million more Americans through privately run insurance exchanges
in each state and extend Medicaid eligibility to an additional
16 million people by raising limits on household income.
"The transaction boosts Aetna's footprint in government
programs, and adds scale to its commercial operations, which we
view as strategically important ahead of the expected
implementation of exchanges and health reform starting in 2014,"
Barclays analysts said in a note to clients.
Aetna, the third-largest U.S. health insurer, will pay about
$42.08 per share - $27.30 in cash and 0.3885 of its common
shares. That is a 20.4 percent premium over Coventry's closing
stock price of $34.94 on Friday.
Aetna Chief Executive Mark Bertolini estimated the combined
company's 2012 revenue at $50 billion. The deal, expected to
close in mid-2013, will add nearly 4 million medical members and
1.5 million members of Medicare Part D, which reduces
prescription drug costs in the government plan for the elderly.
Aetna shares closed up 5.6 percent and Coventry gained 20.3
percent on the New York Stock Exchange.
A GROWING BUSINESS
Chief Financial Officer Joseph Zubretsky said there was
enough opportunity in managing government health plans, even
without the overhaul. Aetna's government business will account
for more than 30 percent of revenue after the deal, up from 23
"The election and SCOTUS were not critical to our strategic
thinking," he said in an interview, referring to the U.S.
Supreme Court's June decision to uphold the "individual mandate"
requiring that most Americans obtain health insurance by 2014 or
pay a tax. "We think we had a very good opportunity to gain
better access to government-based revenues at valuations that
were very reasonable."
If Romney did win the White House and overturned the
healthcare law, Jonas said, Republicans' proposed changes to the
system would also mean plenty of business for insurers.
"The need for scale doesn't change," he said. "We see that
with hospitals and physicians merging into bigger chains as well
as the insurers."
The deal should also help Aetna wield even more influence on
health policy in Washington. The Hartford, Connecticut, company
spent nearly $4 million to defend its interests in Congress last
year, and $2.1 million during the first six months of 2012,
according to U.S. Senate records. Coventry spent $300,000 on
lobbyists over the same 18-month period.
Their combined lobbying would place them among the U.S.
insurance industry's top 10 spenders, according to the nonprofit
Center for Responsive Politics.
Zubretsky said he expects the recent wave of M&A activity to
continue in the health insurance sector and that Aetna would
still have the cash flow for "small discrete transactions."
"The game board is getting a little thin," he said. "There
has been a lot of consolidation recently and I see no reason why
there wouldn't be more."
In July, WellPoint said it would buy rival Amerigroup for
$4.46 billion, nearly doubling its Medicaid business.
Last October, Cigna Corp agreed to buy
HealthSpring Inc for $3.8 billion to strengthen its Medicare
Gabelli's Jonas noted market speculation that Humana Inc
might do a deal, saying that it is strong in Medicare
but fairly small in Medicaid and employer-provided insurance.
"UnitedHealth could easily afford an acquisition but
they have such scale and capability in all areas that they don't
need to do anything," he said.
Including the assumption of Coventry debt, the tranaction is
valued at $7.3 billion, the companies said. Aetna plans to issue
$2.5 billion in new debt and commercial paper to help finance
the deal but does not expect any impact on credit ratings.
Zubretsky affirmed Aetna's financial forecasts for the year
but said they also reflected the fact that the deal would reduce
the company's ability to buy back shares for the rest of 2012.
Aetna said it expects the deal to add modestly to operating
earnings per share in 2013, 45 cents per share in 2014 and 90
cents per share in 2015.
Aetna's financial advisers were Goldman Sachs and UBS
Investment Bank, while Davis Polk & Wardwell LLP and Jones Day
served as legal advisers. Coventry's financial adviser was
Greenhill and Co, and it received legal advice from Wachtell,
Lipton, Rosen & Katz; Bass, Berry & Sims PLC; and Crowell &