em>Medical Device Daily Staff Writer

Aetna (Hartford, Connecticut) and Coventry Health Care (Bethesda, Maryland) have entered into an agreement pursuant to which Aetna will acquire Coventry in a transaction valued at $7.3 billion, including the assumption of Coventry debt. Coventry is a diversified managed healthcare company that offers a full portfolio of risk and fee-based products, including Medicare Advantage and Medicare Part D programs, Medicaid managed care plans, group and individual health insurance, coverage for specialty services such as workers' compensation, and network rental services.

The acquisition is projected to add nearly 4 million medical members and 1.5 million Medicare Part D members to Aetna's membership. On a pro forma basis, the transaction increases Aetna's share of revenues from Government business to over 30% from 23% currently.

Under the terms of the agreement, which has been approved by the board of of each company, Coventry stockholders will receive $27.30 in cash and 0.39 Aetna common shares for each Coventry share, or $42.08 per share, based on the closing price of Aetna common shares on Aug. 17, 2012. In a conference call to investors on Monday, Aetna chairman/CEO and president Mark Bertolini said Aetna "will deliver the funds for the transaction as 65% cash and 35% in Aetna stock." He said this represents a "29% premium to Coventry's 30-day average closing share price."

Aetna expects to finance the cash portion of the transaction with a combination of cash on hand and by issuing around $2.5 billion of new debt and commercial paper. Excluding transaction and integration costs, the transaction is projected to be modestly accretive to Aetna's operating earnings per share in 2013, 45 cents accretive in 2014 and 90 cents accretive in 2015 (based on company estimates of $400 million in synergies in 2015).

The transaction has substantial benefits for Aetna shareholders, said Bertolini. "We are determined to have double-digit returns on invested capital in 2015 consistent with our commitment to deploy capital in economically attractive ways to our shareholders," he said.

The company said the transaction is expected to close in mid-2013.

Bertolini told callers that the "strategic rational for the transaction focused on five different themes: increased membership and diversification, increased government program presence, improved positioning in consumer-based businesses, enhanced capabilities as [Aetna] prepares for exchanges and reform, and attractive financial returns."

Aetna says the Coventry acquisition is expected to:

Add a growing Individual Medicare Advantage business and a leading Medicare Part D business, complementing Aetna's Group Medicare Advantage franchise;

Substantially increase Aetna's Medicaid footprint, creating more opportunity to participate in the expansion of Medicaid and to pursue high acuity populations as they move into managed care;

Improve Aetna's positioning in consumer-based commercial lines of business, including Middle Markets, Small Group and Individual, and;

Add a low-cost administrative platform and value-based provider networks.

A question was asked during the conference call about the timing of the acquisition, especially with the upcoming healthcare reform.

Bertolini said Aetna "thinks diversification is incredibly important as we head into healthcare reform. But, of course, healthcare reform gauges how quickly we needed to do a transaction. So, time was running out for us to consider something like this, because we wanted to have it ready for integration and [have the deal] closed prior to 2014 and healthcare reform kicking off. Secondly, the assets that Coventry has so capably developed provide complimentary capabilities to us in medicare with the individual medicare market, with the PDP program, and with more states in Medicaid which allows us to improve our government position up to 30% of our revenue flow. That said, as we think about exchanges and the market presences we need, we believe that the exchange opportunity is driven by Coventry's low-cost platform, and the product mix they have in the marketplace today, they are ahead of most businesses in getting ready for healthcare reform and we wanted to take advantage of that opportunity. Going into reform, these are the reasons we found it attractive."

Joseph Zubretsky, Aetna's senior executive VP/CFO, said, "This acquisition is in keeping with Aetna's disciplined approach to deploying capital. Coventry's diversified business will enhance and balance Aetna's core Commercial and Government businesses, while its strong local provider relationships will create additional marketing opportunities for our Accountable Care Solutions and provider technology businesses."

Aetna's financial advisors were Goldman Sachs and UBS Investment Bank. Coventry's financial advisor was Greenhill and Co.

Coventry Health Care is a diversified national managed healthcare company that provides a full portfolio of risk and fee-based products including Medicare and Medicaid programs, group and individual health insurance, workers' compensation solutions, and network rental services.

In other dealmaking news:

• Kindred Healthcare (Louisville, Kentucky) has signed a definitive agreement to acquire IntegraCare Holdings (Grapevine, Texas), a portfolio company of private equity firm Flexpoint Ford, for a purchase price of $71 million in cash plus a potential $4 million cash earn out based on 2013 earnings. The company expects to finance the transaction with operating cash flows and proceeds from its revolving credit facility. IntegraCare will have no outstanding long-term debt at closing.

IntegraCare is a provider of home health, hospice and community services which operates 47 locations across Texas. The transaction is subject to several regulatory approvals and other conditions to closing and is expected to close by the end of 3Q12. The company expects that the transaction will be slightly accretive to earnings in 2012 and seven cents to nine cents per diluted share accretive to earnings in 2013.

• Orchid Medical (Orlando, Florida), a leader in ancillary healthcare services, has acquired the surgical implant business from Workers' Implantable Network (WIN; Tampa, Florida). WIN is a company that assists workers' compensation claims professionals with prospective management of implantable devices.

Established by its president/CEO, Stacey Whidden, WIN says it is a natural fit for Orchid Medical, a comprehensive medical service company known for bringing cost containment solutions to the workers' compensation industry.

"As budgets shrink, customers need more and better ways to save money in a workers' compensation system beset with redundancies and cost inefficiencies," said Brian Carwile, CEO of Orchid Medical. "Our customers look to Orchid Medical as a resource for providing new avenues for cost containment, making the WIN initiative a logical step for us."

Robert Kimball, 404-262-5451


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