Aetna to Buy Coventry Health

08/20/2012| 04:55pm US/Eastern

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--Aetna to pay $5.7 billion in cash-and-stock deal

--Deal will increase Aetna's presence in government-financed health care

--Coventry has more than 5 million total members

Aetna Inc. (>> Aetna Inc.) continued the managed-care sector's acquisition streak Monday by announcing plans to buy Coventry Health Care Inc. (>> Coventry Health Care, Inc.) in a $5.7 billion cash-and-stock deal that will boost Aetna's presence in government-financed health care.

The transaction also will lift Hartford-based Aetna's commercial membership. Coventry--which has struggled recently with high costs in Kentucky's Medicaid market--has more than five million members overall, including people who get health coverage through their employers, through the Medicare program for the elderly and through the Medicaid plan for the poor.

"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," Mark T. Bertolini, Aetna's chief executive, said in a release.

Aetna said the deal will solidify the company's position as the third-largest managed-care firm by membership, behind UnitedHealth Group Inc. (>> UnitedHealth Group Inc.) and WellPoint Inc. (>> WellPoint, Inc.), with 22 million combined medical members as of June 30.

Meantime, the deal also will broaden Aetna's focus, traditionally on commercial insurance, more toward government plans. Based on 2012 membership numbers, a combined Aetna and Coventry would get more than 30% revenue from government plans, up from Aetna's current 23% tally.

"We think diversification is incredibly important as we head into health-care reform," Mr. Bertolini said on a conference call.

Big health insurers have been busy acquirers lately as they bulk up their exposure to government-based health plans. Private insurers' Medicare businesses are growing as baby boomers age; meanwhile, their Medicaid businesses are expanding as states look for help restraining costs. Medicaid also is set to grow under the coverage-expanding U.S. health-care overhaul law.

That law has measures that are expected to pressure profit margins, such as requirements to cover people with pre-existing conditions, which could make managing the business more challenging for small and mid-sized insurers. "I think the scale matters now," Allen F. Wise, Coventry's chief executive, said on the conference call.

WellPoint last month agreed to buy Medicaid insurer Amerigroup Corp. (>> AMERIGROUP Corporation) for $4.46 billion, and Cigna Corp. (>> CIGNA Corporation) bought Medicare-focused insurer HealthSpring for $3.8 billion early this year. Humana Inc. (>> Humana Inc.), WellPoint and UnitedHealth all have made smaller deals to boost their Medicare operations.

The latest deal values Coventry at $42.08 a share, based on Aetna's closing price Friday, and represents a 20% premium to Coventry's price after Friday's close. Aetna plans to finance the deal--which it valued at $7.3 billion including Coventry debt--through a mix of cash and $2.5 billion of new debt and commercial paper.

Coventry stockholders will receive $27.30 in cash and 0.3885 Aetna common shares for each Coventry share. Coventry shares surged 18.9% to $41.54 in recent trading Monday, while Aetna shares rose 4.2% to $39.62. Based on the deal's terms and Aetna's recent price, Coventry shares are worth $42.69 each.

Shares of some Medicaid-focused insurers slipped because a big potential buyer--Aetna--has turned its focus elsewhere. Centene Corp. (>> Centene Corp) fell 6.4% while Molina Healthcare Inc. (>> Molina Healthcare, Inc.) declined 1.9% and WellCare Health Plans Inc. (>> WellCare Health Plans, Inc.) slid 2.5%. Shares of all three firms surged after WellPoint announced plans to buy Amerigroup on hopes they could be next in line.

Aetna and Coventry expect their deal to close in mid-2013 pending approval from regulators and Coventry shareholders.

"We believe this transaction makes sense for both Aetna and Coventry," Wells Fargo analyst Peter Costa said in a note to investors. "Coventry adds to several of Aetna's targeted growth areas," he said.

Excluding transaction and integration costs, Aetna said the deal will add "modestly" to its per-share operating earnings in 2013, boost its 2014 numbers by 45 cents and increase 2015 earnings by 90 cents. Aetna also said it expects annual deal-related savings of $400 million in 2015.

Mr. Bertolini highlighted the way the deal sets his company up for 2014, when major provisions from the health-care law, such as state-based exchanges where people can buy coverage, are expected to begin. In a market where people can move freely from one type of coverage to another, a diversified portfolio "is going to be very important," he said.

Bethesda, Md.-based Coventry has nearly four million medical members and 1.5 million people on Medicare prescription-drug plans. Most of the company's medical members are in its commercial insurance business, but Coventry has a growing business for Medicare Advantage plans and Medicaid plans.

Coventry's Medicaid business became significantly larger last year when the company became one of three to win contracts to serve Kentucky's Medicaid population. That business has proved costly after Coventry was surprised by high health-care costs that overwhelmed incoming revenue from the state. The company last month cited progress in both securing more revenue from Kentucky and getting a better handle on costs.

Aetna Chief Financial Officer Joseph M. Zubretsky said on the call that Coventry has a "solid plan" to fix its Kentucky problems.

Aetna--which has talked down the idea of buying Medicaid insurers, citing high prices--has been trying to grow its own Medicaid business from within. The company hit a setback this year when it appeared to win a contract in Ohio, but Aetna had the new business taken away after successful protests from other firms. An Ohio court last week dismissed a lawsuit Aetna filed as part of its effort to win the business.

--Sharon Terlep, Anupreeta Das and Saabira Chaudhuri contributed to this article.

Write to Jon Kamp at jon.kamp@dowjones.com

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