Updated to include analyst comments and added data throughout.
The deal, which comes at a near 20% premium to Coventry's Friday closing share price and was announced Monday, is the second major health care sector merger since President Obama's Affordable Health Care Act was narrowly upheld by the Supreme Court in late June.
For Aetna, a large provider of commercial and individual health care plans, the deal targets Coventry's Medicare and Medicaid customers, which are expected to grow under the expanded coverage of the Act. It also signals that healthcare giants are already planning for drastic change in the sector, even as the Act becomes a key campaign issue and presumptive Republican Presidential candidate Mitt Romney says he would attempt to strike it down.For Aetna, a large regional healthcare care provider, Coventry will add nearly 4 million medical members and 1.5 million Medicare Part D members to Aetna's membership, substantially increasing its exposure to government sponsored health plans. "[We] think that the deal is a good one for [Aetna] who has holes to fill in both its Medicare and Medicaid books and is able to do so at multiples well below what it would have cost to buy pure play operators," wrote Bank of America Merrill Lynch analyst Kevin Fishbeck, in a note to clients. After the deal, Aetna's share of revenues from government business will increase to over 30% from 23%. Excluding transaction and integration costs, the merger is expected to add slightly to Aetna's operating earnings per share in 2013, and will boost EPS by 45 cents in 2014 and another 90 cents in 2015. When including Coventry's $1.6 billion in debt, the merger values it at $7.3 billion. "Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing Government sector and expand our relationships with providers in local geographies," Mark T. Bertolini, Aetna's chairman, chief executive said in a statement released on Monday. In early Monday trading, Aetna shares gained nearly 4% to $39.48, while Coventry Health Care shares surged over 18% to $41.46. Coventry stockholders will receive $27.30 in cash and 0.3885 Aetna common shares for each share, in a cash and stock offer that values the Bethesda, Maryland-based healthcare provider at its highest level since June of 2008. The deal is expected to have modest synergies relative to its size, with Aetna CFO Joseph M. Zubretsky forecasting $400 million in cost savings through 2015 as a result of the merger. Aetna expects to finance the deal using cash on hand and by issuing approximately $2.5 billion in new debt and commercial paper. The deal is expected to close in mid-2013, Aetna added in a press release. In July, 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. After WellPoint announced its deal for Amerigroup, many covering the heathcare sector forecast that it would precipitate a flurry of consolidation within the industry - a notion confirmed by Monday's deal, which is larger in size and scope than the July merger. Medicaid-focused healthcare providers such as Centene (CNC), Molina Healthcare (MOH) and WellCare Health Partners (WCG) have benefitted from the sector overhaul, as some forecast continued consolidation. "Expect other companies with government exposure to see greater investor interest," wrote Credit Suisse analyst Charles Boorady in a July note to clients, highlighting Centene, Molina Healthcare, Humana (HUM), Coventry Healthcare (CVH) and Health Net (HNT) as other healthcare providers with high Medicaid and Mecidare exposure.
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