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

According to preliminary Dealogic second-quarter M&A data, the health care sector represented the third most active market for mergers, surpassed only by the tech and energy sectors.

DaVita's growth in the dialysis market and a similar market share held by German giant Fresenius Medical Care (FMS) makes additional large-scale consolidation in that piece of the health care sector less likely. Fresenius cut one of the largest health care deals of 2011, when it bought Liberty Dialysis Holdings for $1.7 billion. Big consolidation efforts in the PBM space are also challenged after CVS Caremark (CVS) and Express Scripts (ESRX) cut transformational deals in recent years.

However, in June, Walgreen's (WAG) acquisition of European pharmacy giant Alliance Boots highlighted big changes to the earnings prospects of drug store and pharmacy benefits manager giants -- the companies that fill drug prescriptions -- through a string of mega-mergers.

Some estimate that between 16 million to 20 million new Americans would be eligible to enroll in Medicaid through the Affordable Care Act.

For WellPoint, its acquisition of Amerigroup will to add to its earnings per share in 2013, when the deal is expected to close, when accounting for new revenue and integration costs. The company didn't change its 2012 EPS expectations but said its earnings may grow by $1 a share in 2015 as a result of the merger. WellPoint will use both its cash, commercial paper and new debt to fund the near $5 billion cash deal.

Moody's downgraded WellPoint's senior debt rating a notch to Baa2 from Baa1 on Monday, noting that the debt financing of the deal will limit the company's financial flexibility. The deal also signals WellPoint's willingness to cut debt acquisitions and tolerate increasing leverage, Moody's also noted in the downgrade.

Still, the agency sees benefits of the acquisition. "The combination of AMERIGROUP's strong Medicaid platform with WellPoint's Medicare experience should make the company very competitive as states begin the bidding process for this business," noted Moody's Senior Vice President Stephen Zaharuk. Fitch Ratings and Standard & Poor's cut their outlooks on WellPoint's debt, but left their ratings unchanged.

Other risks also remain for WellPoint. Monday's deal could be indicative of the company's geographic and market challenges as it searches for businesses with operating margins above the mid single digits -- and not a panacea.

"This transaction will bring questions regarding WellPoint's ability to operate a strong Medicaid provider in states where it does not have a blue license, notably Texas and Florida," wrote Wells Fargo analyst Peter Costa in a note to clients.

For more on investing in drug stores and pharmacy giants see Express Scripts could be sandbagging synergies in its mega-deal for Medco Health Solutions.

-- Written by Antoine Gara in New York
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