March 27, 2019 / 10:35 AM / 22 days ago

U.S. health insurer Centene to buy smaller rival WellCare for $15.3 billion

(Reuters) - U.S. health insurer Centene Corp on Wednesday said it would buy smaller rival WellCare Health Plans Inc for $15.27 billion, in a move to bulk up its government-backed Medicare and Medicaid businesses while reducing exposure to Obamacare healthcare exchanges.

Shares of WellCare jumped 9.9 percent to $254.20, while Centene shares were down about 7.3 percent to 50.87 after the stock and cash deal was announced.

The announcement comes days after the Trump administration stepped up its opposition to former President Barack Obama’s signature healthcare law. The Department of Justice on Monday said it believes the Affordable Care Act, popularly known as Obamacare, violated the U.S. Constitution and that the law should be struck down.

Centene relies on its Obamacare business for about 40 percent of its earnings, making it among the most vulnerable companies should the law be overturned, according to SVB Leerink analyst Ana Gupte.

The combined company will have 22 million members, up from around 14 million for Centene at the end of 2018.

“The more we can grow in this area, the better the recipients are, the better for the investors ... And there are other very large competitors out there,” Centene Chief Executive Michael Neidorff said on a conference call.

Neidorff, 76, will be CEO of the combined company. He extended his contract in February to remain Centene CEO through the end of 2023 and chairman through 2024.

WellCare CEO Ken Burdick and Chief Financial Officer Drew Asher are expected to take newly-created senior positions at Centene.

The combined company will have a Medicaid business in 22 states, covering more than 11 million lives, according to Jefferies data. That represents a more than 50 percent increase for Centene.

Since the beginning of 2014, when Obamacare’s Medicaid expansion began taking effect on a significant scale, shares of both companies have surged. Centene’s shares are up around 272 percent, while WellCare shares rose around 228 percent.

Neidorff downplayed concerns over the long-term viability of the company’s Obamacare business, suggesting that a recent ruling by a Texas judge that the law is unconstitutional is likely to be overturned by a higher court.

The two companies Medicaid businesses currently have significant overlap, particularly in Illinois, Florida, Georgia and Missouri, according to Jefferies.

The deal is expected to close in the first half of 2020, the companies said. They forecast around $500 million in cost savings in the second year after it closes.

Centene said it had built “a prudent amount of potential divestitures” into its forecasts for cost savings from the deal.

Including debt, the deal was valued at $17.3 billion. The offer price of $305.39 per share represents a premium of about 32 percent to WellCare’s closing price on Tuesday.

WellCare shareholders will get 3.38 shares of Centene common stock and $120 for each WellCare share, giving them about 29 percent ownership of the new company.

“We believe this deal makes strategic sense given ongoing consolidation in the managed care space and the growth opportunities associated with the government-sponsored markets,” MUFG Securities analyst Jason Twizell wrote in a research note.

“This may be a case of striking while the iron is hot, as some larger peers are digesting significant transactions,” he added.

Centene’s planned acquisition of WellCare comes after two large health insurers combined with the two largest U.S. pharmacy benefit managers (PBMs) in deals that closed last year.

In those deals, CVS Health Corp bought Aetna Inc for $69 billion, while Cigna Corp acquired Express Scripts Holding Co for $54 billion.

CVS shares were down nearly 3 percent at $53.80 on Wednesday afternoon. The company has a contract to provide PBM services to WellCare’s customers.

That contract is nearing its end, Burdick said. Given the new company’s increased scale “we think there’ll be some attractive opportunities for us to improve our current position,” he said.

Allen & Company LLC, Barclays, Evercore and J.P. Morgan advised Centene on the deal. Goldman Sachs advised WellCare.

Reporting by Tamara Mathias in Bengaluru and Michael Erman in New York; Editing by Arun Koyyur and Bill Berkrot

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