Medicaid Insurers Turn Targets After Amerigroup: Real M&A

The takeover of Amerigroup Corp. (AGP) at the richest premium for a managed care company in 15 years is turning Medicaid insurers from Centene Corp. (CNC) to Molina (MOH) Healthcare Inc. into the industry’s next targets.

WellPoint (WLP) Inc. agreed this week to buy Amerigroup for $4.9 billion, creating the largest private provider of Medicaid coverage for the poor. The offer was 47 percent higher than Amerigroup’s average price in the prior 20 days, the biggest premium since 1997 for a health maintenance organization acquisition greater than $1 billion, according to data compiled by Bloomberg. Centene, which operates Medicaid plans from Texas to Ohio, and Molina, in states such as California and Utah, are also ripe for takeovers, said Oppenheimer & Co.

States are already turning to private insurers to help manage Medicaid benefits, and President Barack Obama’s health- care law — upheld by the U.S. Supreme Court last month — may add as many as 17 million patients. For potential suitors, Centene offers the fastest sales growth among U.S. managed care firms and Molina trades at the biggest discount to analysts’ 2015 revenue estimates, the data show. WellCare Health Plans Inc., which is cheaper based on earnings, may also lure bids from health insurers, said Susquehanna International Group LLP.

“There definitely will be more M&A activity in the industry now,” Frank Ingarra, the head trader at Greenwich, Connecticut-based NorthCoast Asset Management LLC, which manages $1.4 billion, said in a telephone interview. “The Supreme Court upholding President Obama’s decision put these companies more in play. You have more and more people entering Medicaid. That’s creating an opportunity for them to get more dollars.”

Richest Premium

Laura Hart, a spokeswoman for Long Beach, California-based Molina, and Jack Maurer, a spokesman for Tampa, Florida-based WellCare, wouldn’t comment on acquisition prospects. Deanne Lane, a spokeswoman for St. Louis-based Centene, didn’t return phone calls and an e-mail seeking comment.

WellPoint, the second-biggest U.S. health insurer, is paying $92 a share in cash for Virginia Beach, Virginia-based Amerigroup. The 47 percent premium is the highest since Cigna (CI) Corp. offered a 50 percent premium for Healthsource Inc. in 1997 and is almost double the industry average of 25 percent, data compiled by Bloomberg show.

The deal will make Indianapolis-based WellPoint the biggest private provider of Medicaid coverage with 4.5 million members. WellPoint approached Amerigroup about the acquisition and made a high offer to preempt any other bidders, a person familiar with the deal said this week.

Medicaid Expansion

“The premium you pay is different with Medicaid expansion coming through,” David Windley, an analyst for Jefferies Group Inc. in Nashville, Tennessee, said in a phone interview. “The Medicaid space is an area that is growing. States are moving more populations to managed care and the dual-eligible populations are also attractive,” he said, referring to people who qualify for both Medicaid and Medicare, the assistance program for the elderly.

Starting in 2014, Obama’s health-care law orders states to open Medicaid to people making as much as 133 percent of the federal poverty level. While the Supreme Court last month upheld the Affordable Care Act, it also said the administration can’t strip current funding from states that don’t comply with the expansion. Republican governors in Florida, South Carolina, Louisiana and Texas have already vowed not to participate.

There may still be an estimated $370 billion in contract opportunities related to the expansion of Medicaid, according to a July 10 report from analysts at Wedbush Securities Inc.

‘More Positive’

“The Affordable Care Act and the decision around that was more positive than negative in terms of expanding Medicaid,” Michael Wiederhorn, a New York-based analyst at Oppenheimer, said in a phone interview. “My thought is that most will continue to opt in and expand the Medicaid business, which will be advantageous to Medicaid HMOs.”

Centene, which began offering a health plan in Wisconsin 28 years ago, and Molina, founded by Chief Executive Officer Mario Molina’s father in 1980, are the next likely targets after Amerigroup, said Wiederhorn.

“These companies have huge growth profiles going forward,” he said. “They’re going to drive revenue and that will eventually translate into earnings. They’re just scratching the surface right now.”

Analysts project that by 2015 sales at Centene, which has a market value of $1.8 billion, will have risen faster than every other managed care provider in the U.S., according to estimates compiled by Bloomberg. The company’s revenue may total $12 billion that year, versus $5.3 billion in 2011, the data show.

Cheapest Target

Molina offers acquirers access to Medicaid plans at the industry’s least expensive valuation. The $1.2 billion company trades at 0.13 times estimated sales for 2015, the least expensive multiple among managed care companies, data compiled by Bloomberg show.

Still, Centene and Molina have recanted profit forecasts after encountering higher-than-expected costs in some parts of the country. On June 11, Centene said earnings may be $1.45 to $1.65 a share this year, compared with a previous estimate of $2.64 to $2.84. Molina, which has been increasing its health plans in Texas, said that sales generated in some parts of the state aren’t enough to cover the cost of providing services and withdrew its 2012 earnings guidance on June 6.

WellCare (WCG) may be a more attractive target because of its low valuation, said Chris Rigg, a New York-based analyst for Susquehanna. The $2.7 billion company has a price-earnings ratio of 8.6, lower than 81 percent of its peers, and its stock has outperformed Centene and Molina this year, the data show.

Aetna, Cigna

“People are focused on Centene and Molina, but WellCare is probably a more likely takeout candidate,” Rigg said. “Centene and Molina have stumbled in new markets in the last few weeks, which is depressing earnings.”

WellPoint’s takeover of Amerigroup may compel Aetna Inc. (AET) and Cigna, the nation’s third- and fifth-largest managed care companies by market value, to also acquire Medicaid providers as the number of people eligible for coverage rises, said Thomas Carroll, a Baltimore-based analyst for Stifel Nicolaus & Co.

Without a deal, Cigna’s sales are projected to climb at half the pace of Centene’s over the next four years, and Aetna’s growth will lag that of Cigna, data compiled by Bloomberg show.

“The whole Medicaid managed care pie is getting bigger, and the insurance industry is seeing that one slice of the health insurance world as being a big growth area,” Carroll said in a phone interview. Aetna and Cigna need to “either explain to investors why they aren’t doing it, or start thinking about the fact that they are going to do it.”

Buyers’ ‘Conundrum’

Cynthia Michener, a spokeswoman for Hartford, Connecticut- based Aetna, and Matthew Asensio, a spokesman for Bloomfield, Connecticut-based Cigna, declined to comment on whether the companies are interested in acquisitions of Medicaid providers.

Aetna has said this year that valuations for Medicaid companies are too high for takeovers, and Cigna has said that Medicaid plans aren’t at the top of its acquisition list.

“The conundrum is the management teams have been fairly vocal that they’re not interested in buying Medicaid assets at the current prices, let alone the price WellPoint is paying for Amerigroup,” Susquehanna’s Rigg said. “That said, the strategic rationale for acquiring a Medicaid plan is in place.”

The July 9 announcement of WellPoint’s takeover of Amerigroup boosted other Medicaid insurers’ stocks. Centene climbed 20 percent, the most since October 2006. Molina rose 18 percent, while WellCare surged the most in four years with its 18 percent increase.

“The general consensus on the Street is that these companies will all eventually fall to the consolidation that is likely coming as a part of health-care reform,” said Carroll of Stifel Nicolaus. “Amerigroup is just the first one to go.”

Bloomberg