Dissent Over Merger
Sharmistha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
U.S. health insurer Aetna Inc. (NYSE: AET) signed an agreement to acquire Coventry Health Care Inc. (NYSE: CVH) for $7.3 billion on August 20, 2012. As a result, the Shareholders Foundation, Inc. announced that an investor filed a lawsuit for current stockholders in shares of Coventry Health Care, Inc. (CVH) in effort to stop the proposed takeover of Coventry at a value of approximately $42.08 per share. The claimant alleges that the offer is unfair and grossly inadequate because, among other things, the intrinsic value of CVH stock is materially in excess of the amount offered for those securities, given the Company's prospects for future growth and earnings.
The acquisition is projected to add nearly 4 million medical members and 1.5 million Medicare Part D members to Aetna’s membership. Excluding transaction and integration costs, the transaction is projected to gradually increase Aetna’s operating earnings per share in 2013, 45 cents accretive in 2014, and 90 cents accretive in 2015.
It was agreed that shareholders of Coventry will get $27.30 in cash and 0.3885 Aetna shares for each Coventry share, or $42.08 per share, based on the closing price of Aetna shares on Friday, August 17, 2012. Aetna is expected to issue $2.5 billion of debt and use the existing cash in hand to finance the deal. The deal is likely to close by mid 2013.
Coventry is a diversified managed health care company that offers a full portfolio of risk and fee-based products, including Medicare Advantage and Medicare Part D programs, Medicaid managed care plans, group and individual health insurance, coverage for specialty services such as workers’ compensation, and network rental services.
Coventry is an important player in the Medicare Advantage ("MA") and Medicare Part D programs. The long-term strategic advantage of the deal is that it will allow Aetna to enhance its revenue share in the Government business (MA and Medicare Part D) to 30% from the present 23%.
Aetna is mostly a group Medicare player, meaning it provides Medicare benefits to retirees of its commercial customers. At 6/30/2012, AET had 437,000 Medicare Advantage members and 471,000 Part D stand-alone members offered through its PBM. Aetna’s inroads into the retail (ie, non-corporate) Medicare segment suffered due to a Medicare enrollment ban put into place by CMS for a few years but lifted last year. Even with the ban lifted, Aetna wasn’t growing as quickly as they would've liked. Adding CVH solves AET’s Medicare gap in a big way. Coventry has nearly 1.5 million Medicare Part D members and 253,000 Medicare Advantage retail members. Combined, these two CVH products will bring more than $7 billion in annualized revenue to Aetna's top line. Aetna has the infrastructure to kick start its retail effort in Medicare, where the growth possibilities are huge.
CVH has a commercial presence in the following states: AR, DE, FL, GA, ID, IL, IA, KS, LA, MD,MO, NE, NV, NC, OH, OK, PA, SC, SD, TN, TX, UT,WY, VA, and WVA. The combined company will especially benefit in states where there isn’t a large population base, such as AR, LA, IA and SD.
We think the deal is an excellent one for both companies since Aetna needed to beef up its capabilities in both Medicare and Medicaid and this will strengthen the merger to scaling heights. This deal will give Aetna, the third-largest health insurer in the U.S., a big leap in number of Medicare and Medicaid customers, including poor elderly people on both programs, and in the number of people who buy insurance on their own or get coverage from small businesses. Additionally this will also give Aetna better access to the "lower end" of the health insurance.
Aetna estimates that combining with Coventry Health Care, based out of Bethesda, Md., will save the merged company $400 million a year starting in 2015. “Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing government sector and expand our relationships with providers in local geographies,” Aetna’s chief executive, Mark T. Bertolini, said in a statement.
This merger is the biggest in the health care sector since President Barack Obama enacted the reform law in March 2010. The merged company is poised to make use of the very best minds from both companies which will likely contribute to increased shareholder value. Investing in potential takeover targets can also be very profitable as it creates new growth prospects. I strongly believe that mergers enhance returns in an equity portfolio, particularly in tough market environments such as the current one.
SharmisthaB has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Coventry Health Care. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.