In a bet that the market of government-sponsored healthcare will expand, health plan insurance giant Aetna Inc. agreed to buy rival Coventry Health Care Inc. for $5.6 billion.
The acquisition, announced on Monday, pays Coventry shareholders $42.08 per share, including $27.30 in cash per share and the balance in Aetna common shares. The $42.08 price is a 20 percent premium over Coventry’s closing price on Aug 17. Inclusive of assumed debt, the deal is valued at $7.3 billion.
The deal adds roughly 5 million customers to Aetna, and increases its market share in government-sponsored healthcare plans such as Medicare and Medicaid. The Hartford, Conn.-based Aetna is currently a major player in corporate healthcare plans, but is now a strong contender in the government space.
“Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing Government sector and expand our relationships with providers in local geographies,” said Aetna CEO Mark Bertolini in a statement.
With Coventry in the fold, revenues from Medicare—the program for elderly and disabled—and Medicaid—the program for the poor—will increase from 23 percent to 30 percent of Aetna’s annual revenues.
With the passage and implementation of President Barack Obama’s healthcare legislature, the industry is betting that government revenues will expand quickly in the near future. Last month, Wellpoint Inc. acquired Medicaid insurance company Amerigroup Corp. for around $4.9 billion. Earlier in the year, Cigna Corp. acquired Medicare insurer Healthspring Inc. for $3.8 billion.
“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,” Barclays analysts wrote in a research note on Monday.
In addition, the deal increases Aetna’s footprint among individuals and small businesses, which had been one of Coventry’s strengths.
Research firm Stifel Nicolaus noted on Monday that Centene Corp. and Molina Healthcare Inc. were possible losers in the aftermath of the deal, as no obvious suitors are left to acquire them in the industry. Shares of both companies slumped on Monday.
Credit rating agency Fitch Ratings issued a notice that it is placing Aetna on review for a ratings cut, citing “post-close financial leverage and the integration risks associated with the transaction.”
Fitch also stated that the deal is complex, large, and is primarily debt-financed.
Financial advisors for Aetna include Goldman Sachs Group Inc., UBS AG. Coventry employed Greenhill & Co. Investors cheered the deal, with shares of both Aetna and Coventry gaining on Monday following the merger announcement.
The deal is expected to close in the middle of 2013.
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