Managed Care Firms Bulk Up

OKLAHOMA CITY -- Cigna (CI Quote) is bulking up, hoping that a major acquisition -- its largest in a decade -- will strengthen its position in the fiercely competitive managed care industry.

The health insurer announced late Monday that it agreed to pay $1.5 billion in cash, plus another $400 million in capital investments, for regional managed care provider Great-West Healthcare. The transaction will boost Cigna's health care membership by 2.2 million, or nearly 20%, and establish the company as a major supplier of health insurance to small and medium-sized businesses in the Rocky Mountain region.

Analysts pointed to the buyout as evidence of an ongoing trend, with national health insurers looking for new ways to grow -- and regional players struggling to survive -- as the managed care industry consolidates. UnitedHealth Group (UNH Quote), for instance, earlier this month inked a similar deal, buying Fiserv's(FISV Quote) health business for $775 million.

Cigna expects its purchase to close in the first half of 2008 and boost its profits immediately afterwards. The company will suspend its aggressive stock repurchase program in order to finance the transaction, but Goldman Sachs analyst Matthew Borsch predicts that it will come out better in the end.

"We estimate the transaction should be at least 30 cents accretive to 2008 earnings per share, as compared to the 25-cent accretion we estimated for an equivalent level of share repurchase," Borsch wrote in a research note. "We expect the market will react positively to the transaction, given the potential EPS impact as well as the added network and distribution strength."