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Analyst Blog

Earlier this week, WellPoint Inc. (WLP - Analyst Report) declared the closure of the Amerigroup Corporation acquisition. Consequently, the latter has become a wholly-owned subsidiary of WellPoint.

Amerigroup will now focus on expanding the state sponsored health care programs of WellPoint. Moreover, Amerigroup’s management will supervise the entire Medicaid business of the group company.

At the time of announcing the acquisition in July this year, WellPoint expected the deal to consummate in the first quarter of 2013. However, the deal has been closed earlier than expected.

At that time, WellPoint had also revealed that it will pay $92.00 per share to buy all the outstanding shares of Amerigroup. This amounts to a purchase consideration of about $4.9 billion.

WellPoint had said that it would fund the purchase with cash, commercial papers and issuance of new debts. The company, for this purpose, issued 1.25% senior unsecured notes due 2015 worth $625 million, 1.875% senior unsecured notes due 2018 worth $625 million, 3.30% senior unsecured notes due 2023 worth $1 billion and 4.65% senior unsecured notes due 2043 worth $1 billion in the beginning of September. While this will increase the interest burden of the company, the benefits from the acquisition will likely offset it.

The transaction is expected to boost WellPoint’s earnings from 2013. Moreover, the additional earnings in 2014 are expected to outgrow that of 2013. Similarly, the incremental earnings in 2015 will likely surpass the 2014 level and exceed $1 per share.

The acquisition of Amerigroup has enhanced the enrollment in WellPoint’s affiliated Medicaid health plans in 20 American states to 4.5 million. Moreover, the company’s total enrollment in all affiliated health care plans has increased to 36 million. WellPoint’s medical enrollment stood at 33.5 million as of September 30, 2012. The addition of Amerigroup’s clinical capabilities, resources and expertise will also enhance WellPoint’s ability to serve Medicaid beneficiaries along with the long-term services and support markets.

WellPoint currently carries a Zacks #2 Rank (Buy). We maintain a long-term ‘Neutral’ recommendation on the stock. One of the company’s peers, Molina Healthcare Inc. (MOH - Analyst Report) carries a Zacks #1 Rank (Strong Buy).

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