WellPoint's Deal for Amerigroup Is Landmark 'Obamacare' Merger

Updated to include Moody's rating downgrade, Fitch and S&P actions.

NEW YORK (TheStreet) -- Obamacare has its first major merger, after health care giant WellPoint (WLP) said on Monday that it will buy Amerigroup (AGP), a managed health care company with 4.5 million customers of state sponsored health care programs, for $4.9 billion, or $92 a share in cash.

The deal, which comes at a 43% premium to Amerigroup's Friday closing share price, is the first major health care sector merger since President Obama's Affordable Health Care Act was narrowly upheld by the Supreme Court in late June and adds to a trend of consolidation within the industry.

For WellPoint, which ended 2011 with 65-plus million health care customers including those under Blue Cross and Blue Shield private plans that it is a licensee of, Amerigroup's mostly Medicaid customers will help the company push into state sponsored health care plans that are most impacted by the health care act and court ruling.

Forget the SCOTUS decision, the market has already changed for healthcare stocks

"We believe that this combination will create an industry leader in the government sector serving Medicaid and Medicare enrollees," said WellPoint CEO Angela Braly in a statement. Braly added that the merger, which focuses on Medicaid recipients like the poor and the elderly, is an opportunity to "position our companies for future growth as the health insurance industry changes and as we prepare for health insurance exchanges."

With Amerigroup, WellPoint's Medicaid footprint will be in 19 states, gaining 4.5 million accounts and some dual eligible managed care accounts. The company projects that it will also gain access to $105 billion in annual dual eligible spending opportunities in the four largest states where it's gaining such a presence.

Amerigroup shares rose nearly 40% to over $89.84 a share in early Monday trading on news of the deal, while WellPoint shares climbed nearly 3% to $61.64 a share. Prior to the deal, both companies' shares had declined on the Supreme Court's ruling in June 28.

News of the deal caused some Medicaid-focused healthcare providers such as Centene (CNC), Molina Healthcare (MOH) and WellCare Health Partners (WCG) to surge over 10% in early trading, as some expect continued consolidation.

"Expect other companies with government exposure to see greater investor interest," wrote Credit Suisse analyst Charles Boorady in a note to clients, highlighting Centene, Molina Healthcare, Humana (HUM), Coventry Healthcare (CVH) and Health Net (HNT) as other healthcare providers with highe Medicaid and Mecidare exposure.

While WellPoint executives indicated on a conference call outlining the deal that they would have done the merger with or without the expansion of healthcare reform, Bank of American Merrill Lynch analyst Kevin Fishbeck said that a key to the merger will be gaining access to dual eligible customers of Medicare and Medicaid, who can be among the costliest to insure.

"[The] company highlighted that new business wins in the duals could be dilutive initially, and then ramp up," Fishbeck in a note to clients, who supported WellPoint's announced synergy and earnings projections from the deal.

As investors position on the Supreme Court's landmark health care decision, they may be wise to spend their time understanding how consistent M&A trends are already consolidating the health care sector, with deals like WellPoint's acquisition of Amerigroup expected in coming quarters and years.

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