AET Aetna Inc. (delisted)

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.

 
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HEALTHSPRING IN (HS): Free Stock Analysis Report
 
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