HealthSpring Shareholders Approve Merger - Analyst Blog
January 17 2012 - 11:15AM
Zacks
The acquisition of HealthSpring Inc. (HS) by
CIGNA Corp. (CI) has received the approval
of the former company's shareholders. The approval came
from approximately 83% of the shareholders, at a special meeting
held on January 12, 2012.
The acquisition was announced by Cigna in October last year.
HealthSpring’s vast Medicare business with a trusted brand name
made it the best fit for Cigna, which intends to foray into the
rapidly growing Medicare Advantage business.
With this acquisition, valued at approximately $3.8 billion,
Cigna will get access to 800,000 Medicare prescription customers
and 340,000 Medicare advantage customers. Cigna, the fourth largest
health insurer in U.S., had been historically biased towards
commercial business (primarily self funded) and averse to
government businesses (Medicare and Medicaid).
But it is now targeting the government businesses. This shift in
strategy comes from the fact that the expected demand for Medicare
Advantage products is likely to increase significantly in the
coming years.
We have been witnessing an increasing interest in the Medicare
Advantage (“MA”) space for quite a long time. An MA plan is a
government program, but is offered by commercial insurers to
Medicare beneficiaries.
The first baby boomers will hit their retirement years soon and
will opt for managed care plans. Health insurers are thus looking
to acquire providers of managed care plans to the seniors, which in
turn will help them generate higher revenues. Also, managed-care
plans for Medicare are expected to generate incremental revenue of
$10 billion by 2015, which would make such acquisitions
valuable.
Carriers in the health insurance sector are in a race to win MA
market share and the fastest way of doing this is to plan for such
acquisitions. An overview of the recent deals will provide us some
idea on the pace of merger and acquisition (“M&A”) activity in
this arena.
In November 2011, UnitedHealth Group
Inc. (UNH) announced its plan to acquire XLHealth
Corp, a sponsor of Medicare Advantage health plans.
Similarly, Humana Inc. (HUM) struck two deals
for small Medicare Advantage plans during the third quarter 2011.
In August, it announced an agreement to acquire Arcadian Management
Services. Later in September, it signed a deal for MD Care. Both
deals are expected to close before the year-end and enhance
Humana’s MA membership by 4.1%, upon completion.
On October 1, Aetna Inc. (AET) closed on its
acquisition of Genworth’s Medigap business for $290
million.
Also, during the first half of the year, Brentwood-based
Inspiris, which provides care and care management services to
elderly patients in Medicare, Medicaid and commercial insurance
populations, was acquired by UnitedHealth, while CareMore Health
Group was purchased by WellPoint Inc. (WLP).
Coming back, Cigna will be funding the deal with 80% debt and
the rest would come from equity capital. The company’s debt ratio,
which currently stands at 29%, will go northwards after this
acquisition. But the insurer is generating strong cash flow,
quarter after quarter, reflecting impressive returns on capital in
each of its business segments.
Cigna is expected to release its fourth quarter and full year
2011 earnings on February 2, 2012. The company expects earnings per
share in the range of $5.05–$5.30, while the Zacks Consensus
earnings estimate stands at $5.23 per share.
Cigna currently retains a Zacks #3 Rank, which translates into a
short-term Hold rating. Considering the fundamentals, we are also
maintaining our long-term “Neutral” recommendation on the
shares.
AETNA INC-NEW (AET): Free Stock Analysis Report
CIGNA CORP (CI): Free Stock Analysis Report
HEALTHSPRING IN (HS): Free Stock Analysis Report
HUMANA INC NEW (HUM): Free Stock Analysis Report
WELLPOINT INC (WLP): Free Stock Analysis Report
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