UnitedHealth to Merge with Amil

In an effort to expand its international business, U.S. health insurer UnitedHealth Group Inc. ( UNH - Analyst Report ) has announced to buy Amil Participações S.A of Brazil. UnitedHealth is expected to shell out approximately $4.9 billion in cash for 90% stake in Amil.

Amil Participações S.A. is the biggest Latin America healthcare company of Brazil, serving more than 5 million people via its vast delivery network of 22 hospital and approximately 50 clinics. Its care network includes 44,000 doctors, 3,300 hospitals, nearly 11,000 outpatient clinics and 12,000 ancillary service facilities.

Although the acquisition will slightly be accretive to UnitedHealth’s 2013 earnings, it will increase the company’s financial leverage ratio to around 36%. However, this ratio will eventually trend downwards.

The company will conclude the purchase of Brazilian company's in two phases buying nearly 60% of the outstanding shares from its controlling shareholders by the fourth quarter, subject to receiving of approval from Brazilian regulators and approximately 30% of the shares from public shareholders by the first half of 2013.

Upon the closure of the buyout, Amil’s founder, Dr. Edson Bueno, will remain the chairman and CEO. He will also take place in UnitedHealth Group’s Board of Directors.

In addition to this, the veterans in Amil’s leadership team will retain their positions. Further, Amil’s CEO will invest nearly $470 million in shares of UnitedHealth Group and will hold shares for five years.

This big acquisition marks a strategic move by UnitedHealth, indicating aggressive international expansion at a time when growth in the domestic markets is facing pressures from the new regulations.

UnitedHealth is particularly attracted towards the Brazilin insurance industry that has been experiencing healthy growth as a result of improving economic conditions and the loosening of market regulations in the country. The region is expected to create a huge demand for private insurance as a low unemployment and rising income supports people to spend more on better quality health care needs offered by private insurance companies. As of March 2012, only 25.1% of the Brazilian population was enrolled in private healthcare plans or had private health insurance. The remainder of the population relied on public healthcare services.

United Health has carefully cherry picked Amil keeping in mind the robust sales growth posted by the latter. Amil has posted a strong revenue growth of 17.9% year over year for first half of 2012. Total membership has also increased by 4.9% year over year over the same time period.

We expect to see more health insurers showing their interest in the Brazilian insurance market since it is the largest in South America, and offers the potential to become a more prominent international insurance market. Recent economic stability, positive credit trends, and regulatory reforms that have stabilized the currency and promoted domestic savings have produced sound growth across the insurance industry in Brazil.

UnitedHealth’s peers looking to expand internationally include Aetna Inc. ( AET - Analyst Report ) and CIGNA Corp. ( CI - Analyst Report ) .

UnitedHealth is expected to release third quarter earnings on October 16, and expects to report earnings of $1.45 per share compared with the Zacks Consensus Estimate of $1.25 per share. The company also expects medical enrollment growth of more than 650,000 people in the quarter.

UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term ‘Neutral’ recommendation on the shares.