Centene Corp.’s announcement of a $17.3 billion deal to buy WellCare Health Plans Inc. wasn’t necessarily a shock to some on Wall Street, as it comes less than two days after a DOJ decision that put the future of the Affordable Care Act in doubt.
Late Monday, the Department of Justice said it agreed with a previous Texas district court’s ruling that the entire ACA, also known as Obamacare, is unconstitutional. That was a change from a previous DOJ argument to keep the health-care law mostly intact.
The decision sparked a new fight between Republicans and Democrats, who have been jockeying to be known as the party of health care. President Trump has called on Republicans to revive efforts to dismantle the ACA, and Democrats have introduced legislation to shore up the ACA and expand enrollment.
Don’t miss: Trump asks courts to outlaw ‘Obamacare’ while claiming GOP as the ‘party of health care.’
Also read: Opinion: Trump gives momentum back to Democrats by trying again to kill Obamacare.
Analyst Ana Gupte at SVB Leerink told clients in a Tuesday research note that the companies most exposed to the DOJ’s decision were Centene CNC, -6.81% and Molina Healthcare Inc. MOH, +1.61% and WellCare WCG, +10.07% to a lesser extent.
So on Wednesday, after the Centene-WellCare deal was announced, Gupte said she was “unsurprised” by the combination.
“We see this as a way for [Centene] to drive margin expansion and accelerate growth, while also diversifying against policy risk with the ACA including the TX Court decision,” Gupte wrote in a note to clients.
WellCare’s stock rose 9.2% in midday trade, but was well below the announced deal price of $305.39 a share in cash and stock. That’s because Centene’s stock slumped 8.4% toward a one-year low, as the bulk of the bid was in stock, which is seen as dilutive to current Centene shareholders.
Centene said it would exchange 3.38 shares of its stock plus $120 in cash for each WellCare stock outstanding. Based on Tuesday’s stock closing price of $54.85, the equity component was valued at $185.39. At current prices, the equity component would be valued at about $169.81.
The deal news gave a boost to Molina’s stock, which rose as much as 6.5% intraday before paring gains to be up just 0.3%.
Meanwhile, shares of other managed-care companies fell, with CVS Health Corp. CVS, -3.08% down 3.9%, UnitedHealth Group Inc. UNH, -1.07% losing 1.9%, Cigna Corp. CI, -0.58% falling 1.0%, Anthem Inc. ANTM, -1.85% shedding 2.1% and Humana Inc. HUM, -0.54% giving up 1.0%.
The companies boasted that the merger would create a company that is No. 1 in the health insurance marketplace, including No. 1 in Medicaid and No. 4 in Medicare, with 22 million members across all 50 states. The deal would generate about $500 million in annual cost synergies by the second year after closing, which is expected to occur in the first half of 2020.
“The combined company would be the leader in government-sponsored health care with increased scale and diversification both geographically and in its managed care service offerings, and enhance access to high-quality services for members,” the companies said in a statement. “It will offer affordable and high-quality products to its more than 12 million Medicaid and approximately 5 million Medicare members (including Medicare Prescription Drug Plan), as well as individuals served in the Health Insurance Marketplace and the TRICARE program.”
Centen Corp., WellCare Health Plans Inc.
“Leader in government-sponsored healthcare across all 50 states”
In a post-announcement conference call, Bank of America Merrill Lynch analyst Kevin Fischbeck said while he saw “some real strategic rationale” for the merger, he was “a little bit surprised” given the geographic overlap of the companies’ Medicaid business, including some states where market share was over 50%.
Centene Chief Financial Officer Jeff Schwaneke said the $500 million of synergies included “a prudent amount” of potential divestitures.
Gupte said she expected divestitures would be required in states including Florida and Georgia, but she expects regulatory approval after a review period.
Oppenheimer’s Michael Wiederhorn said among other states where there is significant overlap, Centene may need to “consider its options” with respect to Kentucky.
Wiederhorn said that while the price Centene is paying and the “equity-heavy” deal terms represent a “hefty” premium to its own stock valuation, he reiterated his outperform rating as the company has done a “good job” with mergers and acquisitions in the past.
“Centene has continued to have success with M&A, having successfully integrated the HealthNet transaction in 2016 and more recently recognized significant returns from the 2018 Fidelis transaction in New York,” Wiederhorn wrote in a note to clients. “The company has also done a number of smaller deals, adding capabilities to complement its business.”
Centene’s stock has slipped 1.1% over the past 12 months, while the SPDR Health Care Select Sector exchange-traded fund XLV, -0.86% has rallied 12.1% and the S&P 500 index SPX, -0.44% has gained 7.0%.
