UnitedHealth Puts Its Chips on Vegas

The health insurer pays $2.6 billion for Sierra Health to boost its presence in fast-growing Western markets

UnitedHealth Group (UNH) is poised to take a multi-billion dollar gamble on Las Vegas, hoping to ignite revenues by adding more than 600,000 members in one of the country's hottest regions of population growth.

UnitedHealth, the nation's largest health benefits insurer, announced a $2.57 billion cash deal for Sierra Health Services (SIE), which counts among its members 310,000 employer plans in Las Vegas and 320,000 seniors and others in plans in 10 Western states. Boards of both companies have approved the deal, which values Sierra at $43.50 a share, a 21% premium over the stock's $35.90 closing price on Mar 9. The Federal Trade Commission and regulators in Nevada, California and Texas will review the transaction, which also must be approved by Sierra shareholders.

If approved, UnitedHealth – with about 70 million plan members – would gain a profitable entrance to not only an area that has topped the nation's "fastest-growing cities" lists for more than a decade, but also a health insurance market that is popular among retirees. Sierra operates a network of clinics, Southwest Medical Associates. In that unit UnitedHealth sees "significant opportunities to learn from them and to leverage their expertise in combination with our leading data assets to gain clinical insights that will be useful in a wide variety of broader care delivery settings in our network-based care model," UnitedHealth CEO Stephen J. Hemsley said in a press release.

The deal's relatively small break-up fee, $85 million, affords an opportunity for another large player -- possibly WellPoint Inc. (WLP) -- to step in with a higher bid, UBS (UBS) Investment Research analyst Justin Lake said in a Mar. 12 note to clients. A similar note was sounded by Banc of America analyst Joseph France on Mar. 12. France thinks that Wellpoint may want to bolster its presence in Nevada by buying Sierra.

That issue, probably more than the premium involved, led to the market's surge in Sierra Health shares. The stock gained 15.8% to settle at $41.57 on the New York Stock Exchange. Volume of 8.9 million shares was more than 11 times the average number of shares traded. Lake also said the deal makes "solid strategic sense" for UnitedHealth.

Analysts say it's likely that 2007 will see increased activity for health-care deals, which led to a rally Mar. 12 for other independent players. Health Net (HNT), a California based insurer, jumped nearly 3% to close at $54.39, near a 52-week high, while Coventry Health Care (CVH) of Maryland rose 1.1% to $55.11 on the NYSE.

UnitedHealth, based in Minnetonka, Minn., expects the deal to add 4 cents per share to its profit in the year after closing, not counting cost savings. UnitedHealth expects to book as much as $30 million in operating income in 2008 from the Sierra acquisition.

Also Monday, UnitedHealth said it would repurchase $4 billion to $4.5 billion of its shares this year. The company's shares rose 27 cents to close at $53.27 on the NYSE. The company has been working to restore its financial house since ousting its CEO last year over a backdated stock options scandal. Last week, United Health lowered its total income by $1.5 billion from 1994 through 2005, to account for the improperly granted options (see BusinessWeek.com, 3/6/07, "Strong Medicine for UnitedHealth").

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