Magellan Health, Inc. (MGLN - Free Report) is in talks for a possible sale to private-equity firm Centerbridge Partners, per reports.
Due to its prolonged underperformance, Magellan Heath, in February, came under pressure from activist hedge fund Starboard Value, which owns nearly 10% stakes in the company,
In a year’s time, the stock has lost 25% compared with the industry’s decline of 1.3%.
Until recently, UnitedHealth Group, Inc. (UNH - Free Report) and Anthem Inc. (ANTM - Free Report) were the two top companies competing to acquire Magellan. But UnitedHealth’s recent acquisition of Davita’s Medical Group and Anthem’s buyout of Beacon Options got these players off the table.
Reasons Behind the Company’s Sale
Slowing Down of Top-line Growth: The company has been witnessing a slowdown in its revenues. For 2019, it assumes total revenues to be in the band of $7 billion to $7.2 billion (down from the earlier guidance of $7.2-$7.5 billion), implying year-over-year decline of 3% (calculated at the mid-point). This decline in revenues growth can be attributed to challenges in the company’s Complete Care business and stiff competition in the Pharmacy Benefit Management business.
Pharmacy Management Earnings Under Pressure: This segment’s profit declined 25% year over year in 2018 and further down 47%, in the first quarter of 2019, driven by specialty formulary management contract losses, non-recurring items, and lower PBM membership. Owing to contract terminations and aggressive pricing in the segment, the company expects revenues and earnings to be lower in 2019 as well.
Profitability: Magellan Heath’s return on equity (ROE) undermines its growth potential. The company’s trailing 12-month ROE of 3.9% compared with the industry’s average of 23%, indicates that it is less efficient in using shareholders’ funds.
The sale of Magellan Health seems to be as a viable option now to provide returns to its shareholders.
The deal, if closed, will further consolidate the health insurance industry, which is concentrated in the hands of a few big players. Another deal in the process is that of the acquisition of WellCare Health Plans by Centene Corp. (CNC - Free Report) .
In the recent years, the healthcare industry has witnessed a flurry of mergers and acquisitions, as players aim to boost their growth and diversify operations in the wake of continued uncertainty posed by the changing regulatory policies.
Magellan Health sports a Zacks Rank #1 (Strong Buy).You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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