WellPoint Initiates Consolidation Wave In The Medicaid Industry

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WellPoint (WLP), the nation's second largest health insurer announced on Monday the acquisition of Amerigroup Corporation (AGP) in a deal valuing the firm at $4.9 billion. Analysts already predicted a consolidation wave after "Obamacare" survived in the Supreme Court a couple of weeks ago.

The deal

WellPoint is offering $92 per share in cash for Amerigroup Corporation valuing the firm at $4.9 billion. Shares of Amerigroup rallied 38% in Monday's session closing at $88.79. At this level, shares trade at a relatively large discount of 4% to WellPoint's offer price.

Combined, the two companies will provide Medicaid coverage for 4.5 million members, surpassing UnitedHealth (UNH) which has about 3.5 million clients. Wellpoint, known from its Blue Shield program, admitted that the decision to acquire Amerigroup was partially driven by the Court's decision, although it stresses that the deal makes sense without the ruling. Wellpoint decided to make a knock-out offer for Amerigroup to avoid a lengthy bidding war.

Wellpoint will finance the deal with roughly $700 million of cash at hand and new issues of commercial paper and debt. The deal is expected to be accretive to 2013's earnings and add over $1 per share in earnings by 2015. Given the little geographic overlap, both companies do not expect anti-trust problems. Shareholders of WellPoint reacted moderately positive to the deal as shares ended the day 3.5% higher to $62 per share. Shares have fallen recently after the company reported its second quarter results by the end of June.


The acquisition of WellPoint, which generated $6.3 billion in revenues in 2011 will result in pro-forma annual revenues of $67 billion for 2011. Furthermore, the company's net income of $196 million will drive pro forma earnings to $2.8 billion. The real benefit lies in the abundant synergies. Based on WellPoint's estimate of an accretive impact of $1 per share by 2015, synergies would exceed $300 million per year. Even after taking financing costs into account, pro forma earnings would exceed $3 billion per year. While WellPoint pays a hefty premium, at almost 25 times annual earnings, synergies should be sufficient to make this acquisition a win-win situation for both companies.


Under the President's healthcare plans, many millions of new patients will be covered under Medicaid. In total, an expected 17 million new patients are eligible and execution of the plans is left to U.S. states. On June 28th, 2012, Obama's plan was affirmed in the Supreme Court. Since then, many Republican governors have already indicated that their states will not be involved in the mandatory program.

WellPoint confirms that states most likely will hire private insurers, such as the company itself, to cut costs. According to WellPoint, state and federal programs run at $450 billion per annum compared to "just" $100 billion in private managed plans. Furthermore, the plan will create "dual eligibles", those elderly being eligible for Medicaid and Medicare, providing private insurers with another massive market.


Monday's deal sparked rumors about further consolidation in the Medicaid industry. Molina Healthcare (MOH), WellCare Health Plans (WCG) and Centene Corp (CNC) rose between 18% and 20% on the day. These three smaller operators could be potential targets for UnitedHealth, according to Wall Street analysts. Expect more action in the sector in the coming months after the announcement of the deal.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.