Healthcare giant Aetna (NYSE:AET) announced Monday morning that it intends to acquire Coventry Health Care (CVH) for a deal valued at $42.08, or a 20% premium to Coventry's Friday closing price. The deal will be composed of cash and stock, and it carries an enterprise value of $7.3 billion (including the assumption of Coventry's outstanding debt). This deal follows WellPoint's (WLP) acquisition of Amerigroup (AGP) in early July.
The deal will add over 5 million new subscribers and increase Aetna's exposure to government healthcare spending. The firm expects Coventry to add $0.45 per share in earnings in 2014 and $0.90 per share in 2015, in addition to being mildly accretive in 2013.
Though we never like to see a firm pay for an acquisition with its stock when it's cheap (Aetna trades at less than 10x 2012 earnings), it's hard not to like a deal that will add strong earnings growth at a reasonable multiple/price (about 13x 2012 earnings). Plus, Coventry is not just a play on Medicaid spending, as it also has a pharmacy benefits management segment.
Management denies the move is politically motivated, but we think it's safe to say the company feels Medicaid, as well as the Affordable Healthcare Act, is here to stay. Although we didn't go on an insurer buying spree like hedge fund manager David Einhorn, we continue to hold the Healthcare Select SPDR ETF (NYSEARCA:XLV) in the portfolio of our Best Ideas Newsletter to gain exposure to a number of inexpensive healthcare stocks.
Additional disclosure: We hold the XLV in our Best Ideas Newsletter portfolio.