St. Louis-based Centene Corp. (CNC, Financial) and Tampa-based WellCare Health Plans Inc. (WCG, Financial), two companies in the health care plans industry, announced on Wednesday a definitive merger agreement in which Centene will acquire WellCare for $17.3 billion.
Per the terms of the cash-and-stock deal, WellCare shareholders will receive 3.38 shares of Centene common stock and $120 in cash per share. Based on the Centene’s closing price on Tuesday, WellCare shareholders expect to receive $305.39 per share at merger close.
Companies seek to accelerate health care services
Merger-arbitrage guru John Paulson (Trades, Portfolio) developed a seven-criterion checklist for successful mergers. Key criteria include definitive merger agreement, good strategic rationale, no financing conditions, solidly-performing target and limited regulatory risk. According to the press release, most of the above criteria are met, including good strategic rationale.
Centene Chairman and CEO Michael Neidorff said the merger with WellCare creates a health care enterprise that “is committed to helping people live healthier lives” through several initiatives, including the offering of high-quality health care through affordable health solutions like Medicaid, Medicare and the Health Insurance Marketplace. Other strategic initiatives for the merger include an expanding national footprint and achieving cost synergies.
According to CNBC, Reuters said the merger allows Centene to “better compete against larger rivals” like UnitedHealth Group Inc. (UNH, Financial) and CVS Health Corp. (CVS, Financial).
Target background
GuruFocus ranks WellCare’s financial strength 7 out of 10 on several positive indicators, which include a strong Altman Z-score of 3.33 and $2.11 in cash for every $1 in debt. Despite this, WellCare’s Beneish M-score of -0.90 is greater than the safe threshold of -2.22, suggesting possible earnings manipulation.
WellCare’s profitability ranks a modest 6 out of 10: although the company’s operating margin has increased approximately 10.50% per year over the past five years, its profit margins are underperforming over 67% of global competitors.
Despite low profit margins, WellCare’s three-year earnings before interest, taxes, depreciation and amortization growth rate of 24.80% and three-year earnings per share growth rate of 51.50% outperform over 80% of global competitors.
Merger arbitrage checklist score
Figure 1 illustrates the checklist score for the Centene-WellCare merger.
Figure 1
The score for definitive merger agreement, no financing condition and no due diligence condition are rated 5 out of 5: the press release indicates a definitive merger agreement is in place and the merger is not contingent to financing. Additionally, the boards of the two companies unanimously approved the merger.
The strategic rationale score is 5 as the press release details strong initiatives for the merger. However, the solidly-performing target score is just 3 because the target’s low profit margins compared to competitors and poor Beneish M-score raise concerns. Finally, the merger is reasonably valued: the per-share consideration of $305.39 represents a 21% premium to WellCare shareholders based on the company's 30-day volume-weighted average closing stock price according to the press release.
The score for limited regulatory risk is 3 because the press release did not mention any special regulatory risks, nor did it say the merger is not subject to regulatory risks.
See also
Centene’s share price tumbled approximately 7.20% while WellCare’s share price increased approximately 9.70% on the merger announcement.
Gurus with large holdings in Centene include Lee Ainslie (Trades, Portfolio), Pioneer Investments (Trades, Portfolio) and the Vanguard Health Care Fund (Trades, Portfolio). Likewise, gurus with large holdings in WellCare include Andreas Halvorsen (Trades, Portfolio) and Steven Cohen (Trades, Portfolio).
Disclosure: No positions.
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