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Last week, Humana Inc. (HUM - Analyst Report) announced the closure of its acquisition of Metropolitan Health Networks Inc. – a Florida-based medical services organization. The company will pay $11.25 per share in cash to the shareholders of Metropolitan Health. Additionally, Humana will settle the outstanding debt of the acquired company.

This translates into a purchase consideration of $850 million, excluding transaction costs. Humana funded the acquisition, which was announced in the beginning of November, mainly through the proceeds from the issue of senior notes, apart from using its available cash balance.

Earlier this month, Humana completed a public offering of 3.15% senior notes worth $600 million, maturing in December 2022, and 4.625% senior notes worth $400 million, due December 2042, for this purpose. The issuance has increased the financial leverage as well as the interest burden of the company.

Nevertheless, the acquisition is expected to moderately improve Humana’s earnings from the next year, thereby toning down the negative effect. It is also projected to marginally increase Humana’s medical membership, as Metropolitan Health has a membership base of about 87,500.

Moreover, Metropolitan Health’s 35 state-of-the-art primary care medical centers will be added to Humana’s primary care network. The company’s members will also gain access to Metropolitan Health’s network of affiliated physicians. Metropolitan Health offers medical care to Medicare Advantage, Medicaid and other beneficiaries in Florida. Its business model is focused on primary care.

The impact of the deal on the financial results will be clearer once the company reveals its earnings guidance for 2013 along with its fourth quarter financial results on Feb 4, 2013. The Zacks Consensus Estimate for Humana’s 2013 earnings is currently $7.92 per share, up 5.25% over 2012. The Zacks Consensus Estimate for earnings per share in 2012 stands at $7.53, while that for the fourth quarter stands at $1.08.

Currently, the shares of Humana carry a Zacks #3 Rank (Hold). We maintain a long-term ‘Neutral’ recommendation on the stock. The company’s peer, Cigna Corp. (CI - Analyst Report) carries a Zacks #2 Rank (short-term Buy).

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