Centene adds a giant pharmacy services component with the purchase of Magellan.
M&A activity continues to pick up in the health-care space.
Centene (ticker: CNC) announced Monday that it will pay $95 per share for Magellan Health (MGLN), a 14.7% premium over Magellan’s closing price last Thursday of $82.84. Shares of Magellan were up 12.3%, to $93.00, in early trading on Monday.
Shares of Centene, meanwhile, were up 1% at the open of trading Monday, to $60.62.
The deal comes a year after Centene closed its $17.3 billion acquisition of WellCare Health Plans, another insurer focused on government-sponsored health plans. Centene is one of the largest players in that sector, with a managed care membership of 25.2 million people, with roughly half of them enrolled in Medicaid plans.
Centene said that it expects the Magellan deal to bring in 5.5 million members on government-sponsored plans, 2 million members of Magellan’s pharmacy benefit manager plans, and a behavioral health platform with 41 million members, among other businesses.
“This acquisition accelerates our diversification strategy and enhances our ability to build next generation capabilities in our specialty care business by leveraging our scale and investments in technology,” said Centene CEO Michael Neidorff in a statement.
In an interview with Barron’s on Monday morning, Neidorff said that he chiefly wanted Centene to have access to Magellan’s behavioral-health network, which contracts with states, employers, and other insurers to offer various behavioral health care services.
“Behavioral health is probably the most underserved area,” Neidorff said. “This gives us access to a very broad network… It gives them access to our technology.”
Neidorff said that Magellan will be treated as an independent company within Centene, and that outside clients will have equal access to its behavioral-health product.
“If you have a newly diagnosed diabetic, after they see their endocrinologist, they should go see a psychologist to help them deal with it,” Neidorff said. “You end up with better compliance and a healthier situation.”
Neidorff said that he expects the deal to close in the second half of the year.
On an analyst call Monday, Neidorff said that regulatory approval for the deal wouldn’t pose a major challenge. “It’s complex, but it’s something we’re very used to. We’ve had some that are far more complex,” Neidorff said. “I don’t anticipate any divestitures.”
Magellan recently sold off its Magellan Complete Care business, which offers Medicaid and Medicare plans in certain states, to Molina Healthcare (MOH) for $820 million. Molina Healthcare announced Monday that the transaction closed last Thursday.
In the interview with Barron’s, Neidorff said that the sale of that business was necessary to allow regulatory clearance of the deal.
The immediate reaction to the deal from Wall Street analysts appears to be positive. In a note out early Monday, Cantor Fitzgerald analyst Steven Halper said the transaction looked good for Centene.
“We believe [Magellan Health] is a solid acquisition with modest near term accretion,” Halper wrote. “The company’s leverage ratios will certainly increase again, but given a relatively low cost of capital, the company should be able to drive incremental returns.”
Shares of Centene were down 1.8% over the past 12 months, as of Friday’s close. The stock trades at 11.4 times expected earnings over the next 12 months, according to FactSet, below its five-year average of 14 times earnings. Of the twenty-one analysts who cover the stock tracked by FactSet, 19 rate it a Buy or Overweight, while two rate it a Hold.