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UnitedHealth Group (UNH) announced on Monday that it will acquire a 90% stake in Brazilian Amil Participacoes S.A. for $4.9 billion in cash. Shares of UnitedHealth Group rose 0.8% in Monday's trading session.

The Deal

UnitedHealth Group announced that it will acquire a 90% stake in Amil Participacoes, the largest health care company of Brazil. Amil provides health and dental benefits, hospital and clinical services, and advanced care to more than 5 million customers.

UnitedHealth will acquire 90% of Amil's 359 million shares outstanding, for $4.9 billion in cash. Including tax benefits worth $600 million on a present value basis, the net equity transaction value comes down to $4.3 billion for the 90% stake. The remainder 10% stake will be held by Amil's founder Dr. Bueno for a period of at least five years. The deal value of 30.75 reais, represents a 50% premium over Amil's share price last month.

With the acquisition of Amil, UnitedHealth gets access to a vast and growing healthcare market in South America. In Brazil, some 48 million have private health benefit memberships, just 25% of the total population. In comparison, the US market has penetration rates of 80%.

CEO Stephen J. Hemsley commented on the deal, "Brazil has emerged as a consistently growing and evolving market for private sector health benefits and services. Its growing economy, emerging middle class and progressive policies toward managed care make it a high potential growth market. Combining Amil, the clear market leader serving an under-penetrated market of nearly 200 million people, with UnitedHealth Group's experiences and capabilities developed over the last three decades is the most compelling growth and value creation opportunity we have seen in years."

Amil has annualized revenues of $5 billion in 2012, up 15% compared to the year before. Based on the net $4.3 billion payment for the 90% stake, UnitedHealth values the company at roughly 1.0 times annual revenues. The company has the largest provider network in Brazil with over 44,000 physicians, 3,300 hospitals, 11,000 outpatient facilities and 12,000 laboratories and diagnostics imaging centers.

UnitedHealth will acquire 60% of Amil's shares from controlling shareholders and management, upon regulatory approval. In the first half of 2013, it will make a tender offer for another 30% of shares on the open market. The remainder 10% will be held by founder Dr. Bueno.

The deal is expected to be slightly accretive to 2013s earnings. The deal is subject to customary closing conditions and regulatory approval.

Valuation

UnitedHealth Group ended its second quarter of 2012 with $14.4 billion in cash and short term investments. The company operates with $12.7 billion in short and long term debt, for a net cash position of $1.7 billion. Given the size of UnitedHealth Group and its financial strength, the acquisition can easily be financed.

For the first six months of 2012, UnitedHealth generated revenues of $54.5 billion. The company net earned $2.7 billion, or $2.59 per diluted share. For the full year of 2012, UnitedHealth guides for annual revenues of $110 billion. Earnings per share are expected to come in between $4.90-$5.00 per diluted share.

The market values UnitedHealth Group at $59.5 billion. Excluding the net cash position, this value the operating assets of the firm at $57.8 billion. The market values the firm at 0.5 times annual revenues and 11 times 2012s expected annual earnings.

Currently, UnitedHealth pays a quarterly dividend of $0.21 per share, for an annual dividend yield of 1.5%.

Investment Thesis

Year to date, shares of UnitedHealth Group have risen some 14%. Shares started the year around $50, and peaked at $60 in June after the board of directors approved a dividend increase, and a renewed share repurchase program. At the moment, shares are exchanging hands at $58 per share.

Over the past five years, shares are trading with gains of roughly 20%. Shares fell from a peak of $60 late in 2007 to lows of just $17 in 2008. From that point in time, shares gradually recovered to $58 at the moment. Shares are within reach of all time highs of $64, set in 2005.

Between 2008 and 2012, the company has steadily grown its business. Annual revenues rose from $81.2 billion in 2008, to an expected $110 billion in 2012. Net income rose from $3.0 billion to an expected $5.2 billion over the same period of time. Between 2008 and today, the company retired roughly 20% of its shares outstanding, thereby almost doubling annual earnings per share.

UnitedHealth's deal with Amil is big deal. Amil will add roughly $5 billion in annual revenues, some 5% of the UnitedHealth's total revenues. The deal gives UnitedHealth access to the enormous Brazilian market, and it improves the company's growth profile. The deal has a price tag of 1.0 times annual revenues, compared to a multiple of 0.5 times for UnitedHealth itself. Despite the higher valuation, the deal looks attractive in terms of growth potential and market access.

Shares of UnitedHealth Group trade at a very fair valuation. The company has a strong balance sheet, and trades at just 11 times earnings. Furthermore the company has shown years of growth, while it kept repurchasing shares at a steady pace. Shareholder returns are further boosted by a modest 1.5% dividend yield.

While investors are not too enthusiastic yet, given the modest 0.8% gain on Monday, I expect shares to take out all time highs in the next year. UnitedHealth is a perfect addition to any-long term portfolio.

Source: UnitedHealth Group - Deal With Amil Will Boost The Growth Profile For Years To Come