Why WellCare Health Plans Is Soaring

Shares jumped after the company agreed to be acquired. Here's what investors need to know.

Brian Feroldi

Mar 27, 2019 at 10:45AM

What happened

Shares of WellCare Health Plans (NYSE:WCG), a provider of government-sponsored managed care plans, rose 10% as of 9:44 a.m. EDT on Wednesday. The double-digit jump is a response to the news that the company has accepted a buyout offer from rival Centene (NYSE:CNC). Centene's stock is down about 7% on the news.

So what

Here are the key terms of the deal:

·       The transaction values WellCare at $17.3 billion, including debt. That translates into a price of $305.39 per share, a premium of 32% over Tuesday's closing price.

·       A combination of cash and stock will pay for it. WellCare shareholders will receive $120 in cash for each share of WellCare stock and 3.38 shares of Centene stock. WellCare's shareholders will own about 29% of the combined entity.

·       It's expected to close in the the first half of 2020.

·       Centene CEO Michael Neidorff will lead the combined company. WellCare CEO Ken Burdick will join the executive team.

Centene management thinks this deal makes sense for the following reasons:

·       The company will cut out $500 million in annual costs by the second year after closing.

·       The acquisition will grow the company to 22 million members in all 50 states.

·       The new company will have a significantly expanded Medicaid business and will also gain a foothold in the Medicare Advantage market.

·       The combined entity will be more competitive with larger rivals.

·       The deal will reduce Centene's dependence on Obamacare healthcare exchanges, which currently account for about 40% of the company's earnings. 

·       The transaction will be accretive to earnings in the second year.

Neidorff offered investors the following commentary on the deal:

The addition of WellCare is the next logical step in our growth strategy and to drive value for our collective shareholders. We have long admired the WellCare organization and together look forward to building on our mission of transforming the health of our communities, one person at a time.

Now what

The combined entity is expected to pull in about $97 billion in annual revenue during 2019 and produce roughly $5 billion in EBITDA, so this new business will be huge.

WellCare's stock is currently trading around $254 per share, which is well below the offer price of $305.39. That huge discount suggests that Wall Street is highly skeptical that this deal will actually close. 

The best move that WellCare's shareholders can probably make today is to hold on to their shares and cross their fingers that everything goes according to plan. Only time will tell whether this transaction will clear all of its hurdles.

https://www.fool.com/investing/2019/03/27/why-wellcare-health-plans-is-soaring.aspx