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WellPoint to Buy Amerigroup

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WellPoint Inc. has announced that it has entered into a definitive deal with Amerigroup Corporation , under which it will acquire the latter for roughly $4.9 billion. WellPoint will fund the purchase with cash, commercial papers and issuance of new debts.The company’s shares rose 3.4% to close at $61.95 on July 9.

WellPoint also declared that it would pay $92.00 per share to buy all the outstanding shares of Amerigroup. This reflects a 43% premium on Amerigroup’s closing price of $64.34 on July 6. The deal, which is expected to consummate in the first quarter of 2013, is subject to the approval of various regulatory approvals, antitrust clearance and other closing conditions. Also, the shareholders of Amerigroup should put forth their assent for the deal.

Credit Suisse, a division of the Credit Suisse Group (CS - Free Report) , and Linklaters LLP are acting as the financial and legal advisors to WellPoint, respectively. Goldman Sachs & Co., an operating unit of The Goldman Sachs Group, Inc. (GS - Free Report) , and Barclays, a unit of Barclays PLC (BCS - Free Report) , is mentoring the financial proceedings on behalf of Amerigroup.

WellPoint's total number of patients, which the combined company will serve, will increase significantly to include 19 states.

The news comes on the heels of WellPoint’s acquisition of 1-800 CONTACTS Inc. that increased  its customer base by 3.3 million. WellPoint has lately been on an acquisition spree, and its improving cash position also supports these initiatives.

However, following the company’s announcement of debt issue for financing the acquisition, Moody’s Investor Services reduced its senior debt rating to Baa2 from Baa1 with a stable outlook, according to Reuters. WellPoint has an interest coverage ratio of 11.45%, which is below the industry average of 23.42%. We believe that the issuance of additional debt will further increase the company's interest expense burden. Simultaneously, the company’s ability to meet its debt obligation will become questionable.

WellPoint currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We maintain a long-term Neutral rating on the shares of the company.

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