$1.7 billion deal raises Coventry Health profile

Md. HMO insurer to buy benefits firm, First Health

October 15, 2004|By M. William Salganik | M. William Salganik,SUN STAFF

Coventry Health Care Inc., the Bethesda company that operates regional HMOs in more than a dozen markets, raised its national profile yesterday as it announced it would buy First Health Group Corp. in a stock-and-cash deal valued at $1.7 billion.

The deal, if approved by shareholders and regulators, would create a combined company operating in all 50 states with revenue this year of $6.2 billion.

"I think this is a bet on a very good management team, that has a track record of operating against the consensus," said Thomas Carroll, a health analyst at Legg Mason Wood Walker in Baltimore.

First Health investors will get 0.1791 of a Coventry share and $9.375 in cash for each of their shares. Based on Coventry's closing price yesterday, each First Health share is valued at $17.67. That represents a 17 percent premium over First Health's Wednesday close of $15.04.

Coventry shares fell $5.76, or 11 percent, to $46.29; shares of First Health, based in Downers Grove, Ill., rose $2, or 13 percent, to $17.04.

"What the market doesn't like is that First Health has had problems," Carroll said. Its shares were trading at nearly $25 a share a year ago, but dropped after warnings of lower-than-expected earnings in November last year and again in April.

In a research note, Matthew Borsch, a Goldman Sachs analyst, wrote yesterday that recent earnings results "suggest both companies are struggling with increased competitive pressure that we believe will worsen going into 2005."

Carroll also said the deal was "very much out of the blue," given Coventry's recent track record of acquiring small local HMOs.

Coventry has followed a business strategy somewhat different from other health insurers, which tend to be either national in scope or focused on one regional market.

Coventry, however, operates a portfolio of regional health plans, serving nearly 2.5 million members in 15 markets. The 17-year-old company made 11 acquisitions from 2000 to 2003, according to a March filing with the Securities and Exchange Commission.

"For the short run, we are going to be out of the acquisition business for [2005]," Coventry Chief Financial Officer Dale B. Wolf said in a conference call. Wolf has been tapped to become chief executive when Allen F. Wise, the current CEO, retires in January.

Although headquartered in Maryland, Coventry doesn't have a health plan based here. It serves Maryland residents from its Delaware plan, which has about 100,000 members in the region.

First Health, although in the benefits business, is not an insurer. It maintains networks of doctors and hospitals, and is an administrator of self-insured plans of employers and unions. It also has a workers' compensation unit and runs government programs, including the pharmacy program for Maryland's Medicaid insurance coverage.

Carroll said the deal would offer Coventry a chance to expand its business. Coventry expects to close the First Health purchase in the first quarter of 2005.

The company said it will finance the purchase with existing cash and a new $950 million bank credit line.

Bloomberg News contributed to this article.

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