Centene Corporation (CNC - Free Report) and WellCare Health Plans, Inc. recently announced that the former will purchase the latter for a total value of $17.3 billion per the terms of a definitive merger deal. This transaction, approved by the boards of both companies, will form a premier healthcare enterprise with its primary focus on government-sponsored healthcare programs. Also, the new entity will likely emerge as a leader in the Medicaid, Medicare and Health Insurance Marketplace. The acquisition, subject to closing conditions, is expected to close in the first half of 2020.
Post announcement of the buyout, the WellCare stock rallied 12.3% to close at $259.81 while Centene shares dipped 2.73% to close at $52.12 as of Mar 27, 2019.
Benefits of the Buyout
The combined company with a wider scale and diversification is expected to offer pocket-friendly and high-quality products to more than 12 million Medicaid and around 5 million Medicare members along with catering to individuals served in the Health Insurance Marketplace and the TRICARE program. In total, the consolidated business will have around 22 million members across 50 US states.
Better investment in technology and products is projected to lead to improved health outcomes of the members. The joint organization will operate 31 National Committee for Quality Assurance accredited health plans across the country and gain an enhanced exposure to the government-sponsored health care plans through WellCare's Medicare Advantage and Medicare Prescription Drug Plans. The merged entity will also benefit from leveraging Centene’s evolving position in the Health Insurance Marketplace to penetrating the new territories.
The transaction will help both companies remain committed to their community services in specific zones where their employees and members live and work.
Members will be able to access more comprehensive solutions across many markets and receive affordable and culturally-sensitive healthcare services. By adding WellCare’s market and plans in locations like Hawaii, Kentucky, New Jersey, Michigan, etc., the new entity will be able to operate in a wider geography across the country with a local approach.
Transaction Terms and Financial Impact
The integrated entity is expected to witness around $97 billion of pro forma 2019 revenues and $5 billion of EBITDA. It is also anticipated to generate around $500 million of annual net cost synergies by the second year owing to its ability to cash in on the economies of scale in pharmacy and other medical cost management.
This buyout is also estimated to generate adjusted earnings per share accretion of around mid-single digits in the second year with long-term growth prospects and cost reduction in the market. In the first year, it is expected to be slightly dilutive to adjusted earnings per share.
Per the transaction deal, WellCare shareholders will get a fixed exchange ratio of 3.38 shares of Centene’s common stock and $120 in cash for each share of the WellCare common stock. WellCare stockholders are to receive an implied cash-and-stock consideration of $305.39 per share based on Centene's closing stock price on Mar 26, 2019. On closure of the deal, Centene and WellCare shareholders will own around 71% and 29% of the combined organization, respectively.
Post closure of the deal, Centene estimates its debt-to-capital ratio to be around 40% and expects using its solid earnings and cash flows to achieve its targeted debt-to-capital ratio in the mid-to-upper 30% range within 12-18 months from the time of completing the deal.
The acquirer plans to fund the cash part of the deal through debt financing.
Shares of this Zacks Rank #1 (Strong Buy) company have dipped 2.5% in a year’s time against its industry’s growth of 12.6%.
Other Stocks to Consider
Investors interested in the medical sector can also take a look at some other top-ranked stocks like Anthem Inc (ANTM - Free Report) and Molina Healthcare, Inc (MOH - Free Report) . You can see the complete list of today’s Zacks #1 Rank stocks here.
Anthem and subsidiaries operate as a health benefits company in the United States. In the last four quarters, the company delivered average beat of 7.1%. It flaunts a Zacks Rank of 1.
Molina offers Medicaid-related solutions to meet the health care needs of low-income families and individuals. It sports a Zacks Rank #2 (Buy). In the last four reported quarters, the company delivered average four-quarter beat of 109.41%..
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