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WellCare Health Plans (WCG), the Florida-based managed care services provider, has been discreetly entertaining third-party interest, people claiming knowledge of the situation told dealReporter. The informal ”process” is considered a market check for at least three companies, allowing them to conduct extensive due diligence of WellCare’s recent data. The people cited UnitedHealth Group (UNH), Aetna (AET) and Humana (HUM) as among those parties.
Spokespeople for United and Humana declined to comment. Aetna did not return calls seeking comment. Repeated calls to WellCare’s executive chairman, Charles Berg were also not returned. A WellCare spokesperson said the company’s policy is not to comment on M&A rumors or speculation.
Despite recent news related to a federal and state probe that has plagued WellCare’s share price, it is believed the extent of the current investigation by agencies including the Department of Justice and the Federal Bureau of Investigation (FBI) may not be as severe as first thought.
One industry source claiming familiarity with WellCare said the investigation points to some questionable cost reporting in WellCare’s Medicaid businesses, particularly in its behavioral health unit. But he said he had not seen anything yet to indicate the company has a problem with its Medicare businesses.
It was suggested that the FBI is looking at how WellCare priced different health plans between subsidiaries, among other points. An industry investor claiming familiarity with the situation said he believed the investigation was almost complete, with results expected to be ”mild.”
It was said that third parties are likely waiting to hear the outcome of the probe. However, it was also noted that other companies have been acquired before and during similar investigations. The parties are estimating the potential size of the settlement with the FBI and are taking their time on the due diligence process, it was said.
Larry Bridge, senior VP of payer markets for Trizetto (TZIX), which is being taken private by a consortium led by Apax Partners, said WellCare is well positioned as a takeout target. Although the company has not reported its earnings results over the last two quarters due to the pending investigation, Bridge outlined the company’s recent management turnover and several strategic investments that it has made over the last year.
Bridge concurred that any possible buyers are likely waiting for the results of the investigation.
The first industry source said it was likely that WellCare board director Chris Michalik, also a managing director at Kinderhook Industries, is spearheading the process. ”He is a big private equity guy, so he is going to be looking for the best possible offer if they are going to sell,” said the source.
From 1999 through 2003, Michalik was a partner at Soros Private Equity Partners, a multi-billion dollar leveraged buyout fund sponsored by George Soros.
The industry investor said he believed the recent veteran appointments of Charles Berg as executive chairman, Heath Schiesser as president and CEO, and Thomas O’neil III as general counsel has increased overall interest.
Meanwhile, WellCare continues to benefit from accelerating enrollment in Medicare Advantage programs, and has won new state Medicaid business. The investor said even though WellCare has not filed its quarterly financials, it has to file statutory financials with the state insurance agencies which has proven membership growth is rising at a faster pace than expected.
But it has also been said that the FBI investigation continues to damage the reputation of a very good company. It was noted that the company’s enrollment numbers are better than some stats coming from larger providers of the program.
The market has incrementally reflected these new developments, with WellCare’s share price trading 2.95% higher Wednesday at USD 44.98 per share.
But with valuations still relatively low, the first industry source said buyers could end up getting a favorable price for WellCare. He said Aetna has been positioning itself over the last couple of years for a big expansion of its Medicaid business, including the acquisition of US-based health plan management services provider Schaller Anderson last year. He said Aetna has a proven operational platform where it could add further Medicaid plans.
In addition, the source said Aetna missed out on a lot of big land grab opportunities in Medicare. He said the company is looking at extending their footprint in the Medicare space through acquisitions.
Meanwhile, a second industry source familiar with the situation said merging payers is a feature that United has proven the best at doing. He said United, which acquired Sierra Health Services last year, is able to complete more deals that others may have difficulties with.
Although Humana was considered an equally interested third party by two of the sources in order to ”double down” on its Medicare exposure, the first industry source said he was not certain it would have the means to acquire a company the size of WellCare.
WellCare has a total market capitalization of USD 1.88bn.
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