Aetna Inc. (AET), the third-biggest U.S. health plan, agreed to buy Coventry Health Care Inc. (CVH) for about $5.6 billion to increase its share of government business following President Barack Obama’s health care overhaul.

Aetna will pay $42.08 a share for Bethesda, Md.-based Coventry, including $27.30 in cash and 0.3885 Aetna share, the companies said today in a joint statement. That represents a 20% premium over Coventry’s closing price of $34.94 on Aug. 17, which gave the company a market value of $4.68 billion. Including debt, the deal is valued at $7.3 billion.

The purchase will increase Aetna’s share of business from government health plans including Medicare and Medicaid to more than 30% from 23%, the companies said. Coventry will add more than 5 million customers to Hartford, Conn.- based Aetna’s 36.7 million members, including 1.5 million people on Medicare, the U.S. health insurance program for the elderly and disabled.

“With this transaction, our combined businesses will be positioned to better serve a broader market and develop new partnerships with providers to offer high quality and affordable health care,” Coventry Chief Executive Officer Allen Wise said in the statement. “We look forward to working together to build upon the strengths of each company to take advantage of opportunities during this dynamic time for our industry.”

New Debt

Aetna said it will finance the purchase with a combination of cash on hand and about $2.5 billion in new debt and commercial paper. The deal is expected to close in the middle of next year, the companies said.

The Coventry acquisition will add to Aetna’s operating earnings per share next year, and will add 45 cents to EPS in 2014 and 90 cents the following year, excluding transaction and integration costs, the companies said.

Aetna joins competitors WellPoint Inc. (WLP) and Cigna Corp. (CI) in making acquisitions as the U.S. government expands medical coverage. WellPoint said last month it would buy Medicaid insurer Amerigroup Corp. (AGP) for $4.9 billion, and Cigna bought Medicare specialist Healthspring Inc. for $3.8 billion in January. Aetna Chief Financial Officer Joseph Zubretsky said in an interview last month that he was open to an acquisition of any size as long as it’s a “strategic fit.”

WellPoint, the second-largest U.S. health plan, paid a 43% premium to Amerigroup’s previous closing price, while Cigna paid a 37% premium for Healthspring.

Financial Advisers

Obama’s health care law seeks to add as many as 17 million patients under Medicaid, the insurance program for the poor, while individual states have increasingly turned to insurers to help them manage existing programs at lower costs. Medicare managed-care plans are among the fastest-growing products for health insurers as Americans age.

Aetna declined 0.3% to $38.04 at the close in New York on Aug. 17, giving the company a market value of $12.7 billion. The company’s shares have declined 9.8% this year, while Coventry’s have gained 15%. Aetna’s financial advisers on the deal were Goldman Sachs Group Inc. and UBS AG, and Davis Polk & Wardwell LLP and Jones Day provided legal counsel. Coventry’s financial adviser was Greenhill & Co., and its legal advisers were Wachtell, Lipton, Rosen & Katz; Bass, Berry & Sims Plc; and Crowell & Moring LLP.

To contact the reporter on this story: Kristen Hallam in London at khallam@bloomberg.net

To contact the editor responsible for this story: Phil Serafino at pserafino@bloomberg.net

 

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