Centene doesn’t plan to complete its purchase
of WellCare Health Plans until next year, but the deal-related drama begins
this month.
Centene shareholders meet June 24 to vote on
the $17 billion acquisition. Such approval is
often a formality, but a handful of activist hedge funds reportedly are unhappy
with the deal and may oppose it.
These investors, including Third Point, Corvex
Management and Sachem Head Capital Management, want Centene to put itself up for sale instead of
snapping up a competitor.
It’s a classic case of short-term versus
long-term thinking. Investors might flip their shares for a quick profit if a
bigger health care company were to make an offer, but Centene management has a
long track record of successful acquisitions. The company’s shares have risen
more than fortyfold since 2001.
“There’s been a push to get Centene to be a
seller, but (Chief Executive) Michael Neidorff is not a seller, he’s a serial
acquirer,” says Ana Gupte, an analyst at SVB Leerink in New York.
Chris Meekins, a health care analyst at
Raymond James, also expects the WellCare deal to proceed as announced. He notes
that the top-10 shareholder lists at Centene and WellCare have five names in
common, all long-term money managers such as Vanguard and BlackRock. They’re
unlikely to support a “no” vote that could cause WellCare shares to plummet.
Meekins doesn’t see any other managed care
company making a hostile run at Centene. “You’re unlikely to see anyone come in
without a fully supportive CEO on board,” he said.
Louisville-based Humana is sometimes mentioned
as a possible suitor, but Gupte doesn’t see the fit. Centene’s primary business
is managing state-funded Medicaid coverage, and it has built a presence on the
Obamacare exchanges. Humana, the second-largest provider of Medicare Advantage
for the elderly, pulled out of the exchanges last year.
“Any strategic synergy between the two is very
limited,” Gupte said. “Centene’s presence on the exchanges would not be helpful
to Humana, and the capital that would be required would be meaningful. From a
long-term investor perspective, such a deal would not be attractive.”
A hostile move also would be uncharacteristic
of Humana. “From what I’ve heard, Humana would only do a deal if the company
wanted to be acquired and it was a fully supportive situation,” Meekins said.
“Centene made a strategic decision, and I’m not sure anything has changed.”
Indeed, Centene announced Friday that WellCare’s CEO and
chief financial officer will join its executive team after the merger, with CEO
Ken Burdick signing a two-year contract. Centene promised to announce more
leadership details on June 14.
“We believe the transaction with WellCare is
in the best interest of shareholders as it will deliver significant upside
growth and profitability,” Marcela Hawn, Centene’s chief communications
officer, said in an emailed statement. “We remain as committed to our
combination with WellCare today as we did when we announced it on March 27.”
To sway this month’s vote, the activists must
amass far more voting power than has been reported so far. The Wall Street
Journal said Third Point had invested at least $300 million in Centene, which
would be a 6 percent stake. It wasn’t clear how much of that was owned by May 8,
the record date for voting eligibility.
Meekins thinks antitrust clearance is the
biggest hurdle facing the WellCare deal, but he expects Centene to gain
approval by agreeing to some divestitures. The talk of putting Centene up for
sale instead, he says, sounds more like noise than like any real impediment.
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