SHELBY LIVINGSTON May 28, 2019 05:56 PM UPDATED A DAY AGO
A downturn in the market during the fourth
quarter of 2018 helped Centene score a better price for WellCare Health Plans,
a purchase the companies expect to close in the first half of 2020.
The deal price fluctuated widely over the seven
months of negotiations, reaching as high as $380 per share, consisting of as
much as 55% cash with the rest being shares of Centene common stock, according
to the companies' joint proxy statement filed last week.
By the time the companies reached a merger agreement in late
March, Centene and WellCare had settled on a lower final price that valued
WellCare at about $312 per share and consisted of less cash. The price, which
will continue to fluctuate with the market, is made up of $120 in cash and 3.38
Centene shares for each WellCare share. It reflects a premium of about 35% to
WellCare's closing price on March 26, the day the two companies signed the
merger agreement.
Ana Gupte, managing director at investment firm
SVB Leerink, said a pullback in the managed-care market and WellCare stock more
specifically helped Centene in its negotiations. Health insurers' share prices
generally fell during that quarter, in large part because of a federal judge's decision to strike down the entire
Affordable Care Act as unconstitutional, she said. WellCare's earnings guidance
for 2019 also disappointed investors. Gupte said in a research note last week
that the price of the deal was "a solid result for Centene" despite
the market downturn.
Over the course of the fourth quarter,
WellCare's share price reached a low of $221 in late December, down 31% from
its share price of $322 at the start of that quarter. It has since rebounded to
$272 per share at Tuesday's close. Meanwhile, Centene's share price also fell
to a low of $55 during the fourth quarter, down about 25% from Oct. 1. It
closed Tuesday at about $56.
St. Louis-based Centene was able to capitalize
on that market downturn. Centene CEO Michael Neidorff first approached WellCare
Chairman Christian Michalik in person about a possible acquisition of WellCare
on Sept. 4, 2018. A little more than a week later, Centene sent a letter to
WellCare proposing to buy the company for $350 per share, composed of half cash
and half stock. The proposal reflected a premium of 16% to WellCare's closing
price and implied that WellCare's stockholders would own about 23% of the
combined company.
That was the first of many pitches, and WellCare
turned it down for being "not sufficiently attractive," according to
the proxy.
After some back and forth and discussions about
synergies and regulatory considerations, Neidorff in late October proposed a
deal at $380 per share with a cash component of 55%. That price, he said, would
allow the combined company to pursue other strategic opportunities. WellCare
decided the price was attractive enough to start due diligence and merger
agreement negotiations.
But just a few days later on Oct. 31, Neidorff
put talks on ice amid a market decline that saw both Centene and WellCare
trading at lower prices. Both would continue to decline during the quarter,
reaching their low points on Dec. 24.
The companies starting talking again in January
2019. That month, Neidorff and WellCare Chairman Michalik met at the J.P.
Morgan Healthcare Conference in San Francisco where Neidorff said he again
wanted to try exploring a merger, despite the stock market volatility. Centene
later that month sent WellCare a letter proposing an implied purchase price of
$315 per share, with 35% in cash and 65% in shares—a much lower price than
proposed less than two months before. It reflected a premium of 19% to
WellCare's closing stock price on Jan. 19.
The WellCare board wasn't satisfied and by
mid-February negotiated to get the price per share up to $343 with the same mix
of cash and stock. But WellCare's and Centene's share prices sunk further as
health insurers' stocks tumbled as lawmakers explored the possibilities for
Medicare for All. WellCare's share price sunk to $241 per share on March 15
from $274 on Feb. 15, while Centene's share price decreased to $59 from $64,
according to the proxy.
Ultimately in March, WellCare agreed to a price
that valued the insurer at about $313 per share, with $120 in cash and 3.38
Centene shares for every WellCare share. The deal gave WellCare stockholders
29% ownership in the combined company and two board directors at the combined
company. They announced the merger publicly on March 27.
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