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
) 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
) spent $4.46 billion to purchase Amerigroup, an insurer that specializes in Medicaid. Earlier this year, Cigna (CI
) 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
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Published on Aug 21, 2012
By Leo Sun