CVH Shareholders Approve AET Buyout

U.S. health insurer Coventry Health Care Inc. (CVH) has announced that its shareholders have approved the acquisition of the company by Aetna Inc. (AET - Analyst Report)). Almost 78% of the shareholders have overwhelmingly supported the acquisition.

The approval of the merger agreement by Coventry’s shareholders represents an important milestone for Aetna to complete the former’s acquisition. The abovementioned deal is subject to clearance by the state departments of insurance and other regulators along with other closing conditions.

In August this year, Aetna had signed an agreement to acquire Coventry for $7.3 billion. This represents a total equity purchase price of approximately $5.7 billion. Aetna is also assuming $1.6 billion of Coventry's existing debt. The deal will see light in mid 2013.

Compelling Strategic Transaction

Coventry will provide Aetna with direct access to two of the most exciting business lines: Government programs and Commercial insured business. We strongly believe that the transaction will generate long-term financial and strategic values for Aetna’s shareholders based on its compelling strategic merits:
• Coventry will add 4 million combined medical members to Aetna’s member base.
• Increased Government programs (Medicare Advantage, Medicare PDP, Medicaid) presence.
• Improved positioning and reach in Consumer-based business.
• Enhanced capabilities for 2014 and beyond, via low-cost platforms and value-based networks.
• It will add a network of over 5,500 licensed agents.
• Open other geographies, such as Pittsburgh and St. Louis, where Aetna lacked significant presence traditionally.

Financial Impact of the Transaction

The transaction is anticipated to be modestly accretive to Aetna’s operating earnings in 2013. Moreover, it may add 45 cents per share to its operating earnings in 2014 and 90 cents per share in 2015. Total pre-tax synergies of $400 million are expected in 2015.

Financing

Aetna will pay the purchase consideration to Coventry in 65% cash and the rest 35% as Aetna stock. The cash component of $27.30 per Coventry share will be financed using a variety of sources, including new debt and commercial paper as well as cash in hand at each of the companies at closing.

Integration cost

Aetna will have to incur one-time transaction-related costs of $120 million, including up to $50 million of costs in 2012. Thereafter, there will be cumulative integration costs of $250–$300 million through 2015.

The transaction is positive for Aetna given Coventry’s scale and size. The later’s diversified business portfolio also complements Aetna's own portfolio. Moreover, Aetna holds a strong track record of successfully integrating acquisitions.

Other players are also aggressively seeking deals to gain market share in the government business, which is expected to boom with millions of baby boomers entering retirement age every year. Some notable deals include UnitedHealth Group Inc.‘s (UNH - Analyst Report) acquisition of XLHealth Corp. and WellPoint Inc.’s (WLP - Analyst Report) pending acquisition of AmeriGroup Inc. (AGP).