Bloomberg News

Cigna Agrees to Buy Healthspring to Expand Medicare Business

October 24, 2011

(Updates with closing share prices in seventh paragraph.)

Oct. 24 (Bloomberg) -- Cigna Corp., the fifth-largest U.S. insurer, agreed to buy Healthspring Inc., a health-maintenance organization, for $3.8 billion in cash to triple the number of Medicare customers it serves.

Healthspring investors will receive $55 a share, Cigna, based in Bloomfield, Connecticut, and Healthspring said today in a statement. The offer represents a 37 percent premium over Franklin, Tennessee-based Healthspring’s Oct. 21 closing price.

Medicare managed-care plans are among the fastest-growing products for health insurers as the baby-boom generation ages. With Healthspring, Cigna will add 1.17 million customers served by Medicare, the U.S. health plan for the elderly and disabled. The insurer now is looking for acquisitions that will help direct sales to consumers younger than 65, Cigna Chief Executive Officer David Cordani said in a telephone interview.

“Our focus will be on ways to expand in the individual market in the U.S.,” Cordani said. As for Healthspring, “We’re excited about the growth potential. We have wanted to do this for a while and the timing seems right.”

Earlier on a conference call, Cordani said the Healthspring acquisition fits with the way the market is growing because of an aging population and the 2010 health overhaul.

“This strategy was in place long before the regulation was designed,” Cordani said. “That said, the legislative change accentuates some of the movement in the marketplace.”

Shares Rise

Healthspring rose 34 percent to $53.71 at 4:02 p.m. New York time. Cigna gained 1.4 percent to $45.34. Cigna shares climbed 24 percent this year, less than the 30 percent increase of the six-member Standard & Poor’s Managed Health Care Index.

“The Healthspring acquisition looks like a great fit to get Cigna into the Medicare Advantage market where it really hasn’t had a presence,” said Jason Gurda, an analyst at Leerink Swann in New York.

Medicare managed care has “the best long-term outlook for growth” as the baby boomers began to turn 65 this year, Gurda said in a telephone interview. He said Cigna may have felt that Healthspring would have been snapped up by another managed care company if the insurer hadn’t moved now.

Cigna will seek to expand in the individual-policyholders market as the U.S. prepares to open state health insurance exchanges for consumers as mandated by the 2010 health act, Cordani said in the telephone interview. In particular, the company will target for acquisition companies with established retail distribution networks and consumer-focused technology, he said.

More Acquisitions

The insurer wants to have a distribution network similar to what it maintains outside the U.S., where the company sells to consumers through partnerships with local companies, the Internet and other media.

“Outside the U.S., Cigna has a robust distribution network and we are looking for those capabilities here,” Cordani said.

Cigna is the world’s largest supplier of insurance to offshore employees of multinationals, a business that generates about 19 percent of profit. It also manages health plans for many of the nation’s largest employers who are self-insured.

“Healthspring diversifies Cigna’s business in a direction that management has been clearly and intentionally positive about,” said Dave Windley, an analyst at Jefferies & Co. in Nashville, Tennessee. About 75 percent of seniors are covered directly by Medicare and not by commercial managed-care plans, creating “huge growth potential” in the segment, he said.

Scale Important

“Scale has never been more important in our industry,” said Healthspring Chief Executive Officer Herbert Fritch during the conference call.

Fritch will remain with Cigna serving in a “key role” on the CEO’s leadership advisory team, Cordani said in the interview. The management team and Healthspring’s partnerships with doctors to control the quality of care were among the reasons Cigna made the acquisition, he said.

The Healthspring purchase is the largest managed-care deal announced this year, according to Bloomberg data. It is the second for Cigna in 2011, after the company agreed last month to buy Firstassist Insurance Services, a U.K. travel and protection insurer, for an undisclosed amount.

Cigna also raised its 2011 forecast for earnings excluding one-time items to $5.05 to $5.30 a share from $4.95 to $5.25. The company said that it plans to sell $750 million in shares to help finance the Healthspring acquisition.

PBM Business

SXC Health Solutions Corp., the pharmacy benefits management network that services Healthspring customers, fell 23 percent to $43.37. SXC, based in Lisle, Illinois, may lose the business because Cigna has its own benefits management unit.

“We believe the combination will have many synergies, but we have to consider how Cigna’s existing PBM can be leveraged to better serve and more cost effectively deliver value,” said Mariann Caprino, a Cigna spokeswoman.

Morgan Stanley was financial adviser to Cigna, which received legal counsel from Davis Polk. Goldman Sachs Group Inc. acted as financial adviser to Healthspring, and its legal advisers were Skadden, Arps, Slate, Meagher & Flom LLP and Bass, Berry & Sims Plc.

--With assistance from Elizabeth Lopatto in New York and Anna Edney in Washington. Editors: Bruce Rule, Andrew Pollack

To contact the reporter on this story: Pat Wechsler in New York at pwechsler@bloomberg.net;

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net.


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