Seeking Alpha
Long/short equity, growth, medium-term horizon, registered investment advisor
Profile| Send Message|
( followers)  

United Healthcare (NYSE:UNH) made a big splash yesterday, buying 90% of Brazil's largest healthcare company, Amil Participacoes, for $4.9 billion.

There are a lot of reasons this deal makes sense for United shareholders.

First, Amil's founder Edson Bueno started the company in 1978 and remains at the helm today - making him one of the most knowledgeable healthcare veterans in the western hemisphere.

Over his tenure, Mr. Bueno and his partners built Amil into the largest healthcare provider in Brazil, serving 5.9 million members across six Brazilian states.

Despite the impressive track record, plenty of opportunity remains in the highly fragmented market. Amil only controls about 9% market share.

And, it's not just Amil's experience in managed care that's attractive to United. The company has experience in providing services too. The company owns 20 acute care hospitals and 50 clinics, giving it plenty of experience to help United as it develops its domestic accountable care organization ("ACO").

As for revenue, Amil sales should be close to $5 billion this year, up from $4.4 billion last year - thanks in part to rising rates. The company's membership growth has lagged the broader industry, climbing about 4% in the past 3 years. This suggests United believes there's considerable running room to jump start membership growth, particularly as the economy improves.

As part of the acquisition, Mr. Bueno not only joins United's board but becomes United's biggest individual shareholder, investing some $470 million in stock which he promises to hold for at least five years. As for the 10% United won't be acquiring - Bueno and his partner Dulce Pugliese will hold onto it, for now at least.

"It looks to us like the potential the U.S. market had 20 or more years ago," United Healthcare CEO Stephen Hemsley.

Only a quarter of Brazilians are insured privately, with the majority still receiving care through the public health system. However, private plan membership has grown markedly as the economy has grown.

Currently, unemployment is running only 5.3% and while GDP has cooled from the 7.5% growth in 2010, the country is still growing, albeit at a timid 1.7% this year. Regardless, expansion over the past decade has pushed Brazil ahead of the U.K., making it the 7th largest economy in terms of GDP.

The healthcare market is big and attractive.

The country's population is roughly 200 million, with a labor force of 105 million. GDP per capita is 101st in the world at $11.9k, far below the $49k for the U.S. 21.4% of Brazilians remain below the poverty line. Those numbers indicate an emerging economy with a lot of running room for middle class expansion, and with it growth in healthcare spending.

While 67% of its population is between 15 and 64, similar to America, it's over 65 population is only 6.7%, far below the 13.1% here in the States.

The median age is just 29.6 versus 37.1 in the U.S. And, the population is growing 1.1%, faster than our 0.9%. In Brazil, there are 1.72 physicians per 1k people, while in the U.S. there are 2.67. Finally, the rate of obesity - a major health expense - is just 11.1% in Brazil, versus 33.9% in the U.S.

This suggests tremendous opportunity as health expenditures are roughly 9% of GDP compared to 16.2% in America.

United isn't the first insurer to eyeball overseas market as a growth driver. Cigna (NYSE:CI) has dabbled in both Belgium, through its acquisition of Vanbreda in 2010, and Turkey.

But, most insurers are focused on boosting exposure to Medicare and Medicaid heading into expanding rolls tied to reform.

This year, Wellpoint (WLP) bought Amerigroup (AGP), while Aetna (NYSE:AET) bought Coventry (CVH). United, which is the largest player in the space, has the luxury of diving in overseas.

In addition to announcing its Amil acquisition, United also took the opportunity to issue surprise guidance, indicating it will earn at least $1.45 this quarter, much higher than the Street's $1.24 estimate.

All in, the Amil acquisition increases United's revenue about 4% and will be slightly accretive next year. But, that's not the reason to buy shares in United on the deal.

Instead, shareholders should buy because of the potential for that revenue to grow markedly higher over the next decade and for those experiences to not only support its results here in the States, but in expansion throughout South and Central America.

For those interested, I've also included Q4 seasonality for United Healthcare.

(click to enlarge)

Source: Reasons To Own United Healthcare Following Its Amil Participacoes Purchase