WellPoint Inc., the second-biggest U.S. health plan, will acquire eyeglass and contact-lens retailer 1-800 Contacts to expand its consumer offerings as more people buy their own medical insurance.
WellPoint will pay private-equity firm Fenway Partners about $900 million for 1-800 Contacts, said a person familiar with the agreement who asked not to be identified because the information hasn’t been disclosed. The insurer trimmed its 2012 profit forecast by 4 cents as a result of the deal, to $7.80 a share, Indianapolis-based WellPoint said in a statement today.
WellPoint is the biggest seller of health plans to individuals, a market set to grow by as much as 22 million people under the 2010 U.S. health-care law. Fellow insurers are pursuing similar strategies, with Aetna Inc. announcing it will sell coverage this year through Costco Wholesale Corp.’s stores and UnitedHealth Group Inc. introduced a line of hearing aids.
“Over time, the consumer will become the primary purchaser,” said Wayne DeVeydt, WellPoint’s chief financial officer, by telephone. “With the continuing shift to the individual, our focus is around areas that can create more convenient access” as well as lowering the cost of goods sold.
The acquisition sells prescription contact lenses and glasses online and over the phone and has about 3.3 million customers today, according to the statement. 1-800 Contacts has pretax profit margins of 10 percent or more, compared with about 4 percent to 5 percent for WellPoint, DeVeydt said.
WellPoint fell 1.4 percent to $65.45 at the close of New York trading. The shares have fallen 15 percent in the past 12 months.
The announcement frustrated some investors who wanted the money spent on share buybacks that would’ve boosted earnings immediately, said Joshua Raskin, a Barclays Plc analyst in New York.
The purchase should give the company “a strategic advantage” in an era of advancing customer choice, Raskin said. “WellPoint will be able to add another service to consumers that is differentiated from its competitors,” he said. “Obviously, share repurchases do nothing to improve the attractiveness of WellPoint’s products.”
The Supreme Court is expected to rule this month on a constitutional challenge to Obama’s Affordable Care Act. The acquisition makes sense even if the law is overturned, because more employers are handing insurance-purchasing decisions to individual workers, the CFO said.
“Health-reform really accelerated the movement to the consumer-purchasing environment, but we still see it occurring no matter what,” DeVeydt said.
The direct-to-consumer eyewear business is fragmented, with 1-800 Contacts leading with just 10 percent of the market, DeVeydt said. While WellPoint will focus on integrating its purchase over the next 18 months, “we view this as an industry that’s still far from consolidated,” he said.
Fenway, based in New York, acquired 1-800 Contacts in June 2007 for $340 million. The sale to WellPoint was first reported earlier today by The Wall Street Journal.
Brooke Gordon , a spokeswoman for Fenway Partners, didn’t immediately respond to a voicemail requesting comment.
UnitedHealth, the largest U.S. insurer, is based in Minnetonka, Minnesota, and Aetna in Hartford, Connecticut.
Financed by Cash
The deal is being financed with cash on hand, the statement said. Sonenshine Partners LLC acted as Fenways’s financial adviser and Ropes & Gray LLP as its legal adviser, the private-equity firm said in a separate statement. Linklaters LLP was WellPoint’s legal adviser.
Laboratory Corporation of America Holdings also announced an acquisition today, saying in a statement it would buy testing company Medtox Scientific Inc. Laboratory Corp., based in Burlington, North Carolina, said it would pay $27 a share, for an enterprise value of $241 million.
Hospital company Universal Health Services Inc., meanwhile, said in a statement that it would buy Ascend Health Corp., an operator of nine psychiatric facilities. Universal Health, based in King of Prussia, Pennsylvania, said it would pay $500 million.