Coventry Health Care To Acquire First Heath Group for $1.8B

Maryland-based Coventry Health Care has agreed to purchase Illinois-based health benefits services company First Health Group for $1.8 billion in cash and stock, the Washington Post reports (Shin, Washington Post, 10/15). The acquisition, which requires approval from regulators and shareholders, would create a combined company with operations in all 50 states and revenue of $6.2 billion this year. Coventry currently operates regional health plans that serve almost 2.5 million members in 15 markets (Salganik, Baltimore Sun, 10/15). Most of the markets are located in the mid-Atlantic and Midwestern regions (Investor's Business Daily, 10/15). First Health currently maintains networks of physicians and hospitals and administers self-insured health plans for employers and unions. In addition, First Health operates a workers' compensation division and administers some government programs. Coventry plans to finance the acquisition of First Health with cash reserves and a new $950 million bank credit line. Under the acquisition, First Health investors would receive 0.1791 of a Coventry share and $9.375 in cash for each of their shares (Baltimore Sun, 10/15).

Acquisition Strategy
According to the Post, the acquisition of First Health, which is expected to close in 2005, marks the latest in a series for Coventry (Washington Post, 10/15). Coventry closed 11 acquisitions between 2000 and 2003, according to documents filed with the Securities and Exchange Commission in March (Baltimore Sun, 10/15). "Coventry Health Care has built a very successful market position in 15 regions throughout the United States. The acquisition of First Health enables us to extend our success far beyond our existing borders," Allen Wise, president and CEO of Coventry, said (Washington Post, 10/15). Coventry CFO Dale Wolf added, "For the short run, we are going to be out of the acquisition business for (2005)" (Baltimore Sun, 10/15).

Analysts Raise Doubts
Analysts raised some doubts about benefits of the acquisition of First Health by Coventry. Goldman Sachs analyst Matthew Borsch said that financial results of Coventry and First Health "suggest both companies are struggling with increased competitive pressure that we believe will worsen going into 2005." Steve Graybill, senior benefits consultant at Mercer Human Resources Consulting, said, "Both companies will still struggle against the Blue Cross Blue Shields, the Cignas, Aetnas and UnitedHealths. Whether they increased the value of the company or not is yet to be seen" (Washington Post, 10/15). Thomas Carroll, a health analyst at Legg Mason Wood Walker, said that the acquisition was "very much out of the blue," adding, "I think this is a bet on a very good management team that has a track record of operating against the consensus" (Baltimore Sun, 10/15). Michael Obuchowski, a principal at Altair Investments, said that Coventry must "prove (it) can integrate and really benefit from the larger size" (Investor's Business Daily, 10/15).