WellPoint shares jump after $4.9B deal for Amerigroup

Investors gave a cheer Monday morning to WellPoint Inc.’s $4.9 billion deal to acquire a Virginia-based Medicaid managed care company.

Shares of the Indianapolis-based health insurer shot up more than 5 percent in pre-market trading after WellPoint said it would purchase Amerigroup Corp. They closed the day up 3.4 percent.

Investors and analysts like the fact that WellPoint is playing more aggressively in government-sponsored health plans, such as Medicaid and Medicare, which are projected to be the areas for growth the next several years.

“This acquisition aligns WellPoint much better with where the market is heading in terms of customers and markets,” said Charles Boorady, an analyst at Credit Suisse, during a conference call on Monday morning.

The deal will bring WellPoint more than 2.6 million Medicaid members in 12 states—more than doubling the 1.9 Medicaid members WellPoint currently manages. The combined companies would be the largest provider of Medicaid managed care in the nation.

Medicaid is a health insurance program for the poor funded jointly by states and the federal government. Along with the federal Medicare program for seniors, it is expected to be a key driver of growth for health insurers over the next few years.

Only 45 percent of Americans in Medicaid programs are part of managed care plans run by private entities such as WellPoint. But the company expects that proportion to rise to 60 percent in 2014 as President Obama’s 2010 health care law brings 17 million new people into the program by making adults with incomes up to 133 percent of the federal poverty limit eligible for the program.

One potential hurdle for WellPoint is the recent ruling by the U.S. Supreme Court, which gave states the option to not expand their Medicaid programs as called for by the health care law.

However, WellPoint CEO Angela Braly and Amerigroup CEO Jim Carlson both said they expect the Medicaid expansion by states to proceed pretty much as expected before the Supreme Court decision.

“We do believe the Medicaid expansion will go forward,” said Carlson during the conference call with investors and analysts. “There are billions of federal dollars that are going to flow into the states; we think the states are going to need to take it.”

Braly also emphasized during the conference call that Amerigroup will help WellPoint win more business with so-called “dual eligibles”—seniors on Medicare who also have incomes low enough to qualify for Medicaid.

The combined companies will have a presence in 13 states that have significant populations of “dual eligibles,” including such large states as California, Florida and Texas. State contracts to serve those patients could total $16 billion annually, according to WellPoint’s estimates.

“Many state governments are facing significant budget challenges as they strive to provide access to health care for the most underserved residents,” Braly said. “We expect the states to take varying approaches to address these challenges which will lead to more managed care solutions and innovative programs to serve those who are eligible for both Medicare and Medicaid.”

Braly also said Amerigroup’s knowledge of Medicaid members would jibe nicely with CareMore Group, the California-based provider of health care and health insurance to seniors in Medicare, which WellPoint acquired last year for $800 million.

WellPoint has been trying to replicate CareMore’s locations, and even expects to expand its services to New York soon.

WellPoint officials expect the latest acquisition to close in the first quarter of 2013, pending approval by Amerigroup shareholders. WellPoint’s purchase price represents $92 per share for Amerigroup investors—a 43-percent premium to the stock’s closing price on Friday. Amerigroup's stock soared 38 percent Monday morning, to $88.80 per share.

WellPoint will spend $700 million in cash, along with $4.2 billion in debt, to cover the purchase, said Chief Financial Officer Wayne DeVeydt.

Amerigroup had annual revenue last year of $6.3 billion, up 9 percent from the previous year.

When the companies combine, they expect to have more than $70 billion in annual revenue. They would jointly have more than 36 million Americans enrolled in their health plans, more than any other company.

DeVeydt said the two companies have identified $125 million in annual synergies they can achieve by 2015. Those savings, along with further revenue growth, should boost WellPoint’s annual profit $1 per share.

Last year, WellPoint earned a profit of $7 per share, excluding investment losses.