I'll serve up my brief thoughts on WellPoint's decision to buy Amerigroup for $4.9B in cold cash even though I don't have a dog in this fight at present. The strategic rationale is probably a bet on Medicare's ability to deliver new consumers of managed care plans (courtesy of the federal government's mandate) at a very high cost to those clients. The cynic in me just can't avoid picturing the captive audience of Americans who will soon find their care rationed at an unavoidably high premium.
The lock on a captive market is probably the only good reason for a company trading at a P/E of 8 (i.e., a discount to the S&P 500's long term average of 14) to buy a target now trading at a P/E of almost 29. WellPoint only had $2.2B in cash on last quarter's balance sheet, so borrowing another $2.7B will put its long term debt over $11B. That's more than 4x its present net income, and adding Amerigroup only brings in about another $200M in net income (while assuming responsibility for another $400M in Amerigroup's long term debt). I consider any long term debt load greater than 2x net income to be dangerously high, something to be avoided in my Alpha-D Portfolio.
WellPoint may be counting on the prospect of added pricing power in a consolidating market for anyone held hostage to Medicare. This deal does not appeal to me, unless I can sell some puts under AGP before the deal closes. I may just do that if the AGP options chain remains viable for a few more days. The prospect of making some quick cash from under a stock price supported by an all-cash transaction is the only good thing I see here.
Full disclosure: No position in WLP or AGP at this time, although I reserve the right to sell cash-covered puts under AGP in the very near future.
The lock on a captive market is probably the only good reason for a company trading at a P/E of 8 (i.e., a discount to the S&P 500's long term average of 14) to buy a target now trading at a P/E of almost 29. WellPoint only had $2.2B in cash on last quarter's balance sheet, so borrowing another $2.7B will put its long term debt over $11B. That's more than 4x its present net income, and adding Amerigroup only brings in about another $200M in net income (while assuming responsibility for another $400M in Amerigroup's long term debt). I consider any long term debt load greater than 2x net income to be dangerously high, something to be avoided in my Alpha-D Portfolio.
WellPoint may be counting on the prospect of added pricing power in a consolidating market for anyone held hostage to Medicare. This deal does not appeal to me, unless I can sell some puts under AGP before the deal closes. I may just do that if the AGP options chain remains viable for a few more days. The prospect of making some quick cash from under a stock price supported by an all-cash transaction is the only good thing I see here.
Full disclosure: No position in WLP or AGP at this time, although I reserve the right to sell cash-covered puts under AGP in the very near future.
