WellPoint Inc. (WLP:US), the second-biggest U.S. health insurer, will buy Amerigroup Corp. (AGP:US) for $4.9 billion, a move that may spur a wave of acquisitions as companies compete to manage an expanding Medicaid market.
Amerigroup stockholders will receive $92 a share in cash, 43 percent more than the July 6 closing price, according to today’s statement by the two companies. The agreement makes Indianapolis-based WellPoint the biggest private provider of Medicaid coverage for the poor with 4.5 million members, eclipsing the 3.5 million served by UnitedHealth Group Inc. (UNH:US)
President Barack Obama’s U.S. health-care law seeks to add as many as 17 million patients under Medicaid, while individual states have been increasingly turning to insurers to help them manage existing programs at less cost. WellPoint Chief Executive Officer Angela Braly said both aspects played a role in the decision to purchase Amerigroup.
“The deal makes sense as it diversifies WellPoint’s revenue away from its commercial business while expanding the company’s participation in the substantial Medicaid growth opportunity,” said Jason Gurda, a Leerink Swann & Co. analyst in New York, in a note to clients.
WellPoint currently gets about a quarter of its operating income from plans sold to small businesses and individuals, markets where profit margins are likely to suffer under new regulations from Obama’s health-care law, Gurda said. The tradeoff in the deal may be less opportunity for share buybacks and dividends, he wrote.
WellPoint rose 3.4 percent to $61.95 at the close in New York, while Amerigroup, based in Virginia Beach, Virginia, climbed 38 percent to $88.79. UnitedHealth, based in Minnetonka, Minnesota, is the biggest U.S. health insurer.
The WellPoint move may also serve to boost acquisition interest in other insurers specializing in Medicaid, a program run jointly by the state and federal governments. said Thomas Carroll, an analyst at Stifel Nicolaus & Co. in Baltimore.
“We’re somewhat surprised by Amerigroup’s willingness to sell,” Carroll said by telephone. “There’s just so much growth in the Medicaid space, why not do it yourself? But I guess the price was just too good to pass up.”
Molina Healthcare Inc. (MOH:US), based in Long Beach, California, gained 18 percent to $27.12. Tampa, Florida-based WellCare Health Plans Inc. (WCG:US), increased 18 percent to $62.56, while Centene Corp. (CNC:US) of St. Louis, which jumped 20 percent to $34.76.
WellPoint approached Amerigroup about the acquisition and made a high offer to pre-empt any other bidders, a person familiar with the deal said in a telephone interview. Amerigroup wasn’t for sale or running an auction, said the person, who asked not to be identified because the discussions were private.
There’s no provision for Amerigroup to shop itself to other potential buyers, the person said.
Company officials declined to discuss how the deal came together during a conference call with analysts today, saying details will be revealed in a proxy statement.
The deal was planned “no matter what the Supreme Court decided” on the fate of the 2010 health-law that includes the Medicaid expansion, WellPoint’s Braly said in a conference call with analysts.
That provision, set to take effect in 2014, “is only one element here,” she said.
While the Supreme Court upheld the Medicaid expansion in a June 28 ruling, it also said the administration can’t strip current Medicaid funding from states that don’t participate. Republican governors in Florida, South Carolina, Louisiana, Iowa and Mississippi have said they won’t be involved.
Even with the uncertainty still surrounding the law, which Republicans have vowed to overturn if they can capture both houses of Congress in the upcoming elections, insurers are planning to gain from their Medicaid plans.
States seeking to cut costs are increasingly turning to insurers to manage their programs, opening up new sources of revenue for the companies, WellPoint’s Braly said. Medicaid, run jointly by the state and federal programs, spends about $450 billion annually and only about a fifth of its members are in private managed-care plans, the companies said.
Amerigroup may also help WellPoint grab a larger share of the market serving so-called dual eligibles, enrollees who receive both Medicaid and Medicare, the health plan for older Americans. There are 9 million such people in the U.S., accounting for $300 billion in annual spending, Braly said.
The dual eligibles opportunity “is tremendous, and was a driving force for this transaction,” Braly said.
Braly said she didn’t expect a problem with antitrust regulators, given that there’s little overlap between the two insurers. While WellPoint owns 14 state Blue Cross plans across the country, including in California and New York, it has little presence in states where Amerigroup is strong.
Another bidder for Amerigroup is unlikely given the “very full price” WellPoint is paying, said Carl McDonald, a Citigroup analyst in New York, in a note to clients. “And there are still several other Medicaid assets out there like Centene, Molina and WellCare that wouldn’t require a bidding war.”
The acquisition should be completed in the first quarter of 2013, the companies said. WellPoint will pay with $700 million in cash on hand, commercial paper, and by selling new debt.
The deal should add to WellPoint’s earnings next year, even with acquisition costs, with the benefit growing to more than $1 a share by 2015, the companies said. WellPoint reiterated its prior profit forecast of $7.57 a share for 2012.
Credit Suisse Group AG and Linklaters LLP advised WellPoint. Virginia Beach, Virginia-based Amerigroup’s advisers were Goldman Sachs & Co. And Barclays Plc, with Skadden, Arps, Slate, Meagher & Flom LLP providing legal guidance.
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