(Reuters) ? Health insurer Cigna Corp will buy HealthSpring Inc for $3.8 billion to jump-start its business selling Medicare plans as more elderly Americans become eligible for the U.S. government program.
Medicare is an enticing market for U.S. health insurers, even as Congress weighs cuts to the program to rein in the country's debt.
In particular, the entry of the postwar baby boom generation into retirement is expected to swell the ranks of privately run Medicare Advantage plans, which now account for 25 percent of Medicare enrollment, compared with 75 percent for government-run plans. Medicare beneficiaries have the option of receiving their benefits through private health insurance plans.
"The expectation is that that 25 percent rate will increase," said Jefferies & Co analyst David Windley. "There's some increasing view that the political pendulum has swung in favor of Medicare Advantage plans in recognition that they are the one group out there doing something to reduce Medicare costs."
UnitedHealth Group Inc and Humana Inc are the largest private players in Medicare. Large insurers WellPoint Inc and Aetna Inc have also struck deals to expand their presence, but Cigna's purchase of HealthSpring is by far the biggest single bet.
(For a graphic on major health insurance deals, see: http://link.reuters.com/sak64s.)
HealthSpring has about 340,000 Medicare Advantage members in 11 states and the District of Columbia, and more than 800,000 enrollees in stand-alone Medicare prescription drug plans.
The deal represents a major diversification for Cigna and marks the most significant move by Chief Executive David Cordani since he took the helm nearly two years ago. Cigna had focused its U.S. health insurance plans on businesses, though Cordani sought more international expansion.
The deal gives Cigna another avenue for growth, said Oppenheimer & Co analyst Michael Wiederhorn. "It gets them exposed to Medicare Advantage with acquiring a company that is extremely well run and well established."
While overall M&A activity has slowed in the last few months, transactions such as the HealthSpring buy are happening as companies look to expand into new businesses or cut costs.
Recent deals include Kinder Morgan's $21 billion deal for El Paso Corp and Google Inc's planned $12.5 billion purchase of Motorola Mobility Holdings Inc.
SEGMENT EXPANSION
Cigna plans to buy HealthSpring for $55 a share, a 37 percent premium over the closing price on Friday, the companies said in a statement on Monday. HealthSpring shares jumped 33.5 percent to $53.61 in morning trading, while Cigna slipped nearly 1 percent to $44.29.
Cigna said it would issue new equity to cover about 20 percent of the purchase price, with the rest funded by additional debt and cash.
Shares of other health insurers that specialize in Medicare rose after the deal was announced. Humana rose 4.1 percent, Universal American Corp gained 3.4 percent, and WellCare Health Plans jumped 5.3 percent.
"There are still a few larger plans in the industry that want to become bigger Medicare players, and the number of plans out there (both public and private) with more than 50,000 lives is relatively small," Citigroup analyst Carl McDonald said in a research note.
Shares of Canadian pharmacy benefit manager SXC Health Solutions Corp, which counts HealthSpring as a major customer, tumbled 24 percent on concerns that business may move to Cigna.
Investors have expected consolidation in the health insurance industry as a U.S. healthcare overhaul enacted last year squeezes smaller companies and creates incentives for larger companies to take advantage of scale.
The lack of major deals to date may stem from concerns that the Obama administration and state insurance regulators could push back against transactions that threaten competition or drive premiums higher.
Asked whether the HealthSpring deal would face regulatory hurdles, Cordani told reporters on a conference call that it was a "segment expansion" into an area where the company is not a large player and therefore should not meet opposition.
"It's not a scale-based consolidation," Cordani said. "We're obviously aware of the environment around scale-based consolidation."
The companies plan to close the transaction in the first half of 2012.
MEDICARE MORE VALUABLE
The deal values HealthSpring at a "relatively rich" $3,200 per member, compared with the current industry average of about $869, Wells Fargo analyst Peter Costa said, "showing that Medicare members appear to be worth more than typical commercial members."
HealthSpring's management, headed by CEO Herb Fritch, will now lead Cigna's Medicare expansion.
Cigna expects the deal to add to its earnings per share in the first full year of operations. Separately, the insurer raised its forecast for 2011 adjusted earnings to a range of $5.05 to $5.30 per share from a previous view of $4.95 to $5.25.
Cigna's financial adviser is Morgan Stanley, and its legal adviser is Davis Polk, while Moelis & Co advised Cigna in connection with financing. Goldman Sachs & Co was the financial adviser to HealthSpring, whose legal advisers were Skadden, Arps, Slate, Meagher & Flom LLP and Bass, Berry & Sims Plc.
(Reporting by Lewis Krauskopf in New York; additional reporting by Toni Clarke in Boston; Editing by Gerald E. McCormick, Lisa Von Ahn and John Wallace)
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