Any Way To Profit From This Health Insurance Merger?

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Health insurance giant Humana (NYSE: HUM) reported earlier this month that it intends to purchase Metropolitan Health Networks (NYSE: MDF).

Humana is a major Louisville-based health insurance provider with over 40,000 full-time employees and nearly 20 million total members in all regions of the United States. The company provides group health insurance through employer plans, retail health care plans, and supplemental programs for Medicare and Medicaid patients. It also offers multiple specialty health and wellness products.

Florida-based Metropolitan Health Networks is a smaller network of about 35 primary-care clinics and practices that operate primarily within its home state. It also includes a number of network-affiliated but nominally-independent primary-care physicians. The company's focus on serving patients who use Medicare, Medicaid and Medicare Advantage makes it an ideal addition to Humana's portfolio. In addition, many of its current clients already carry insurance coverage through Humana.

Metropolitan Health Networks shareholders stand to receive $11.25 per share as a result of this merger. With about 45 million Metropolitan shares outstanding, the total stock value of the deal will approach $500 million. Humana has also agreed to assume the company's existing debts. The total value of the deal will be between $850 million and $900 million.

Relative to its latest closing price of $11.23, Metropolitan Health Networks' shareholders will receive a premium of $.02. This translates to a percentage gain of about .2 percent. The stock has risen to its current price from an intermediate low of about $10 since news of the merger became official.

Humana is set to complete its purchase of Metropolitan Health Networks by the end of the first quarter of 2013. Humana will fund the purchase using cash reserves as well as a new debt facility. It expects the purchase to increase its 2013 revenues and earnings by a modest amount.

Although the deal is now governed by a definitive agreement, its final execution is conditioned upon several factors. First, Metropolitan's current shareholders must vote to approve the merger. This vote is to be held towards the end of 2012 and faces some uncertainty due to the continued rise in the company's stock price.

Secondly, the merger cannot occur before the end of the first quarter of 2013 due to the mandatory "waiting period" imposed by Hart-Scott-Rodino antitrust regulations. Although this deal is not expected to face any complications, its outcome technically hinges upon the findings of the customary antitrust investigation.

Finally, Metropolitan's executive board is currently the target of several simultaneous investigations relating to alleged violations of its fiduciary responsibility to the company's shareholders. Launched by various U.S.-based law firms, these investigations seek to determine whether the agreed-upon purchase price significantly undervalues the company. 

While no lawsuits have yet been filed, these investigations may affect the pending purchase in two ways. First, the filing of an actual lawsuit could complicate the merger's legal foundations and delay the deal. Secondly, certain information uncovered during the course of the investigations could persuade a critical mass of Metropolitan's shareholders to vote against the deal as it currently exists.


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