Health insurer Aetna Inc. (AET: Quote) on Monday said it has agreed to buy diversified managed health care company Coventry Health Care Inc. (CVH: Quote) for $7.3 billion, including assumption of debt, making itself a major player in the government-financed health care business. In pre-market activity, Coventry shares gained around 21 percent.
According to the Wall Street Journal, the value of the deal, excluding debt, would be $5.7 billion in cash and stock.
The boards of both companies have approved the deal. Under the terms, Coventry stockholders will receive $27.30 in cash and 0.3885 Aetna shares for each Coventry share, or $42.08 per share, based on Aetna's closing price on last Friday. The per share price of the deal represents a premium of around 20.4 percent to Coventry's closing price on Friday.
Excluding transaction and integration costs, the acquisition would be modestly accretive to Aetna's operating earnings per share in 2013, would add around 45 cents per share to Aetna's earnings in 2014 and 90 cents per share in 2015.
On a pro forma basis, the deal increases Aetna's share of revenues from Government business to over 30 percent from 23 percent currently.
The company projects synergies from the transaction to be $400 million annually in 2015. These cost efficiencies are expected to support Aetna's efforts to drive costs out of the system and offer products at a lower price point in the marketplace.
Aetna expects to finance the cash portion of the purchase with a combination of cash on hand and by issuing approximately $2.5 billion of new debt and commercial paper. The transaction would close in mid-2013, subject to Coventry stockholder approval, as well as other customary closing conditions.
Aetna expects the acquisition of Bethesda, Maryland-based Coventry to add nearly 4 million medical members and 1.5 million Medicare Part D members to its membership.
The company also projects the deal to improve its positioning in consumer-based commercial lines of business, including Middle Markets, Small Group and Individual. It is also expected to add a low-cost administrative platform and value-based provider networks.
Mark Bertolini, Aetna's chairman, CEO and president, said, "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."
Bertolini added, "Once the transaction is completed, our larger capital base also will enhance our ability to continue to invest in innovation, technologies and capabilities to lead the transformation of the U.S. health care industry."
Under Obama's healthcare reform law, Medicaid is set to expand from 2014.
In the transaction, Aetna's financial advisors were Goldman Sachs and UBS Investment Bank. Coventry's financial advisor was Greenhill and Co.
AET settled lower by 0.3 percent on Friday at $38.04.
CVH gained 0.7 percent to close at $34.94. In pre-market activity, shares gained $7.21 or 20.64 percent and are currently at $42.15.
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by RTT Staff Writer
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