Aetna Buys Coventry for $5.6 Billion for Government Plans

Updated on
Aetna Chief Financial Officer Joseph Zubretsky
Aetna Chief Financial Officer Joseph Zubretsky said in an interview last month that he was open to an acquisition of any size as long as it’s a “strategic fit.” Photographer: Daniel Acker/Bloomberg

Aetna Inc., the third-biggest U.S. health plan, agreed to buy Coventry Health Care Inc. for $5.6 billion, in the latest bid by an insurer to boost government business under President Barack Obama’s health overhaul.

Aetna will pay $42.08 a share for Bethesda, Maryland-based Coventry, the best performer in New York trading among medical insurers this year. That represents a 20 percent premium over Coventry’s closing price of $34.94 on Aug. 17, which gave the company a market value of $4.68 billion. Including the assumption of Coventry debt, the deal is valued at $7.3 billion, Hartford, Connecticut-based Aetna said in a statement.

Aetna joins competitors WellPoint Inc. and Cigna Corp. in making acquisitions over the past year as the U.S. government expands medical coverage. The purchase means 30 percent of Aetna’s revenue will come from federal-backed plans for elderly Medicare enrollees and low-income Medicaid patients, compared with the current 23 percent. Aetna’s reach in the markets for small businesses and individuals will also grow.

“It’s a deal that almost had to happen,” said Thomas Carroll, a Stifel Nicolaus & Co. analyst in Baltimore. “For Aetna to really compete effectively amongst the other large, national managed-care companies, they have to do more in terms of gaining market share in the commercial business as well as getting a bigger foothold in Medicare and Medicaid, which are the growth areas in managed care over the next decade.”

Aetna rose 5.6 percent to $40.18 at the close in New York, while Coventry surged 20 percent to $42.04. Aetna had declined 9.8 percent this year through Aug. 17, the last day of trading before the deal was announced. Coventry had gained 15 percent, the most in the S&P 500 index tracking the six biggest insurers.

New Customers

The deal will add more than 5 million customers to Aetna’s 36.7 million members, including 250,000 people on Medicare health plans and 930,000 on Medicaid. Coventry provides prescription drug coverage to 1.5 million more Medicare enrollees as well.

Obama’s health-care law seeks to add as many as 17 million patients under Medicaid, while individual states are turning to insurers to help manage existing programs at lower costs. Medicare managed-care plans are among the fastest-growing products for health insurers as Americans age.

At the same time, employer-backed plans that make up the bulk of Aetna’s business face pressure amid the weak U.S. economy and new regulations in the health law. Much of the law kicks in starting in 2014.

‘Time Running Out’

“We think diversification is incredibly important as we head into health-care reform,” Mark Bertolini, Aetna’s chief executive officer, said today on a conference call with analysts. “Time was running out for us to consider something like this because we want to have it ready for integration and closed prior to health-care reform kicking off.”

The law also imposes a new tax on insurers to help pay for covering the uninsured, as well as regulations expected to squeeze profit margins in the commercial sector.

“Scale matters now,” said Coventry CEO Allen Wise. “Our senior management board and board thought it was in the best interest of our shareholders, that we were stronger together than apart.”

The deal also will expand Aetna’s reach among smaller employers and customers who buy coverage on their own instead of through an employer. Both markets are expected to expand under the health overhaul.

“Coventry’s historic strength with small businesses and individuals will balance Aetna’s strength” with big employers, the CEO said.

Deal Financing

Aetna said it will finance the purchase with a combination of cash on hand and about $2.5 billion in new debt and commercial paper. The deal is expected to close in the middle of next year, the companies said. The price for Coventry includes $27.30 in cash and 0.3885 Aetna share, the companies said.

The purchase will add to Aetna’s operating earnings per share next year, add 45 cents a share in 2014 and 90 cents the following year, excluding transaction and integration costs, the companies said.

The acquisition would be the biggest for a health insurer in the past five years. There have been 119 acquisitions of health-maintenance organizations in that period, with an average size of $646.6 million and an average premium of 30 percent, according to data compiled by Bloomberg.

Previous Deals

WellPoint said last month it would buy Medicaid insurer Amerigroup Corp. for $4.9 billion, and Cigna bought Medicare specialist Healthspring Inc. for $3.8 billion in January.

WellPoint, the second-largest U.S. health plan by enrollment, paid a 43 percent premium to Amerigroup’s previous closing price, while Cigna, the fifth biggest paid a 37 percent premium for Healthspring.

Aetna Chief Financial Officer Joseph Zubretsky said in an interview last month that he was open to an acquisition of any size as long as it’s a “strategic fit.”

UnitedHealth Group Inc., based in Minnetonka, Minnesota, is the largest insurer. WellPoint is based in Indianapolis and Cigna in Bloomfield, Connecticut.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE