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July 20, 2012 5:52 pm

Magellan Health exploring strategic alternatives

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This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

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In the latest sign of consolidation in the managed care sector, Magellan Health Services (NASDAQ:MGLN) has been exploring strategic alternatives, two industry sources told dealReporter.

The specialty managed healthcare company has been working with Credit Suisse for at least the past several months, these sources said. Credit Suisse declined comment. A spokesperson for the company declined to comment.

On Thursday afternoon, Magellan’s stock jumped more than 12% after dealReporter said the company was considering options.

This spring some potential bidders approached lenders to discuss financing for a deal, said the first industry source, who added he did not know the current status of talks. The second source said it was his understanding that the sale process is now at an advanced stage. It remains unclear if a deal for Magellan will be reached, this source said.

The Avon, Connecticut-based company has been on the radar of private equity for some time as it has been trading at lower multiples relative to the industry, said the second source and two industry bankers. Magellan has come to market “multiple” times, claimed the first source, including when Express Scripts (NASDAQ:ESRX) was pursuing a merger with its pharmacy benefits manager peer Medco Health Solutions.

On 9 July, WellPoint (NYSE:WLP) announced it had reached an agreement to acquire for USD 4.9bn Amerigroup (NYSE:AGP), which specializes in Medicaid managed care. Magellan’s operations overlap managed care and pharmacy benefit.

With the Supreme Court ruling upholding health reform, Magellan has become a more attractive target, said one of the industry bankers, as reform is expected to increase Medicaid patient enrollment for the industry.

UnitedHealth (NYSE:UNH) may look at Magellan as an addition to its care and pharmacy management division, Optum, said the first industry banker. A combination of Optum and Magellan could help UnitedHealth with cost containment, he said. Otherwise interest is expected to come from financial sponsors, the banker noted.

As the company has been facing some growth challenges, it may be able to achieve a price of around 8x EBITDA in a sale, or around a 35% premium to its stock price, said the first industry banker. The company would fetch 7x to 8x EBITDA in a sale, said a second industry banker. For a leveraged buyout, a sponsor buyer would be expected to obtain 5x to 6x EBITDA leverage for the deal, with an equity check of 2x to 3x EBITDA, added the first industry banker.

Magellan reported a ttm EBITDA of USD 232m for the period ending 31 March 2012. The company has no long-term debt but does have USD 58m in letters of credit outstanding as of 31 March 2012.

Magellan provides management of behavioral health, radiology, specialty pharmaceutical and pharmacy benefits programs for health plans, employers and government agencies.

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