Aetna (AET) Buys Coventry (CVH) for $5.7 Billion

This week, health insurance company Aetna (AET: Charts, News) surprised investors when it announced that it would acquire rival Coventry Health Care (CVH: Charts, News) for $5.7 billion to increase its stake in the government-funded coverage market.

Hartford, Connecticut-based Aetna, the country's third largest health insurer, is paying a 20% premium to acquire Bethesda, Maryland-based Coventry. The initial $5.7 billion deal will be paid in cash and stock, but Aetna will also inherit $1.6 billion in debt from Coventry, boosting the cost of the acquisition to $7.3 billion. While the boards of both companies have approved the deal, it is still subject to regulatory review before being finalized. Daily Chart
Coventry is considered a key player in the federally sponsored Medicaid program in the United States, which doubled its Medicaid enrollment last year to approximately 1.5 million members. Medicaid is a state-federal program which provides medical coverage to poor and disabled patients. On a state level, private insurers such as Aetna and Coventry are hired to provide Medicaid coverage to state residents. 60 million people are currently on Medicaid in the United States. This number is expected to increase as a result of President Obama's sweeping health care reforms, which now require citizens to be covered by medical insurance or face fines. Obama's overhaul is expected to take effect in several months, and Aetna will be well poised to reap the benefits of Coventry's Medicaid customer base. States are also starting to move "dual eligible" residents - who are eligible for both Medicare and Medicaid due to expensive medical conditions - to cheaper managed care programs. The Coventry acquisition is also expected to increase Aetna's Medicare Advantage and Medicare prescription drug businesses. Medicare Advantage is a privately run version of the government's Medicare program. The aging baby boomer generation is also expected to boost demand for these services and drugs. Acquiring Coventry also complements Aetna's acquisition last year of Genworth Financial's (GNW: Charts, News) Medicare supplement business, which offers supplemental coverage to Medicare recipients. By acquiring Coventry, Aetna expects to increase its revenue from the government from 23% to 30% over the next year. Earnings are forecast to "modestly" increase next year, excluding transaction costs, but expects an annual gain of 45 cents per share in 2014 and 90 cents per share by 2015. Aetna's acquisition is but the latest in a flurry of Medicaid/Medicare based consolidations in the health insurance industry. Last month, WellPoint (WLP: Charts, News) spent $4.46 billion to purchase Amerigroup, an insurer that specializes in Medicaid. Earlier this year, Cigna (CI: Charts, News) acquired rival HealthSpring for almost $4 billion to increase its Medicare revenue. Shares of Aetna trade at 7 times forward earnings with a 5-year PEG ratio of 0.79. The stock has traded in a wide 52-week range between $33.43 and $51.14. The stock rallied over 3% during Monday trading on the news of the acquisition. Aetna pays a quarterly dividend of 18 cents per share - a 1.78% yield at current prices. Although investors have apparently cheered the company's decision to acquire Coventry, credit ratings agency Fitch has placed Aetna's debt rating on "Rating Watch Negative," warning that the company is heavily leveraging itself with a higher debt load in order to digest Coventry. Fitch also noted that the transaction is much larger than Aetna's acquisitions in previous years. Other News About AET Fitch May Cut Aetna Inc. Ratings Fitch believes that Aetna is shouldering too much debt in its recent acquisition. Insurer Aetna to Buy Coventry in $5.7 Billion Deal Aetna pays big bucks to increase its Medicare-based revenue. Other Stocks in the News Facebook Stock Slides to All-Time Low Is Facebook's stock headed towards zero? Lowe's Misses Estimates, Lags Home Depot Lowe's disappoints, outdone by rival Home Depot. Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.

Published on Aug 21, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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