WellCare Health Plans acquired by Centene: fairness opinion by Goldman Sachs and Allen and Barclays
Deal terms
Each share of WellCare common stock converted into the right to receive $120.00 in cash and 3.38 shares of Centene common stock. Implied value of $305.39 per share based on Centene's March 26, 2019 closing price of $54.85 (Allen & Company / Barclays); Goldman Sachs used $312.83 based on Centene's March 25, 2019 closing price of $57.05.
Implied value per share by method vs. $120.00 offer
Ranges as disclosed in the banker’s summary of analyses; the red line marks the per-share consideration.
Opinion of Goldman Sachs to the target board
Discounted cash flow assumptions
Discounted to present value as of December 31, 2018, mid-year convention. A separate pro forma combined company DCF (same 7.00%-8.25% discount rates and 2.25%-2.75% perpetuity growth) produced combined company equity value of $84-$126 per share, which after applying the 3.38x exchange ratio and adding $120.00 cash implied merger consideration value of $404-$547 per WellCare share.
Selected precedent transactions (15)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2002-04-29 | Trigon Healthcare Inc. | Anthem Inc. | — |
| 2003-10-27 | WellPoint Health Networks Inc. | Anthem Inc. | — |
| 2003-10-27 | Mid Atlantic Medical Services, Inc. | UnitedHealth Group | — |
| 2004-04-26 | Oxford Health Plans, Inc. | UnitedHealth Group | — |
| 2004-10-14 | First Health Group Corp. | Coventry Health Care, Inc. | — |
| 2005-07-06 | PacifiCare Health Systems, Inc. | UnitedHealth Group | — |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. | — |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group | — |
| 2011-10-24 | HealthSpring, Inc. | Cigna Corporation | — |
| 2012-07-09 | Amerigroup Corporation | WellPoint, Inc. | — |
| 2012-08-20 | Coventry Health Care, Inc. | Aetna Inc. | — |
| 2015-07-02 | Health Net, Inc. | Centene Corporation | — |
| 2015-07-03 | Humana Inc. | Aetna Inc. | — |
| 2015-07-24 | Cigna Corporation | Anthem Inc. | — |
| 2017-12-04 | Aetna Inc. | CVS Health Corporation | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| P / NTM EPS (forward price/earnings) | 13.0x | 20.3x | 25.5x | 13.0x–25.5x | $183.36–$359.67 |
| 1-day acquisition premium | 0.1x | 0.2x | 0.4x | 0.1x–0.4x | $263.36–$344.24 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Historical Stock Trading Analysis | 52-week high/low closing prices for WellCare of $321.88 and $189.96 for period ended March 25, 2019; implied consideration of $312.83 represented a 2.8% discount to the 52-week high, a 30.0% premium to the $240.73 March 25, 2019 close, 26.2% premium to 1-month VWAP of $247.83, 23.0% to 3-month VWAP of $254.33 and 19.9% to 6-month VWAP of $260.89. | $189.96–$321.88 |
| Illustrative Present Value of Future Share Price - WellCare Standalone | Applied forward P/E multiples of 16.0x-20.0x to WellCare standalone EPS estimates for CY2020-CY2023, discounted back to March 25, 2019 at a 7.8% cost of equity. | $243.41–$339.47 |
| Illustrative Present Value of Future Share Price - Value to WellCare Shareholders (pro forma) | Applied forward P/E multiples of 13.0x-16.5x to pro forma combined company EPS for CY2020-CY2021, discounted at 7.8% cost of equity, multiplied by the 3.38x exchange ratio and added $120.00 cash. | $317.63–$394.91 |
Engagement letter dated March 22, 2019; transaction fee estimated at approximately $44 million, all contingent upon consummation of the mergers.
Opinion of Allen to the acquirer board
Discounted cash flow assumptions
Present value as of February 28, 2019. Excluding potential net synergies: $215-$326 per share; including potential net synergies: $321-$476 per share. A separate Centene DCF used discount rates of 8.0%-9.5% and 2.0%-3.0% perpetuity growth, implying $55-$87 per Centene share vs. $54.85 closing price.
Selected public companies (7)
Anthem, Inc. · Centene Corporation (CNC) · Cigna Corporation · Humana Inc. · Molina Healthcare, Inc. · UnitedHealth Group Incorporated · WellCare Health Plans, Inc. (WCG)
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| P / CY2019E Adjusted EPS (WellCare selected companies) | 9.8x | 14.1x | 16.6x | 13.0x–16.0x | $178.00–$218.00 |
| P / CY2020E Adjusted EPS (WellCare selected companies) | 8.7x | 12.4x | 14.7x | 11.5x–14.5x | $185.00–$234.00 |
| P / CY2019E Adjusted EPS (Centene selected companies; implied Centene value per share) | 9.8x | 15.1x | 17.3x | 11.5x–16.0x | $48.00–$67.00 |
| P / CY2020E Adjusted EPS (Centene selected companies; implied Centene value per share) | 8.7x | 13.2x | 14.7x | 10.5x–14.5x | $50.00–$70.00 |
Selected precedent transactions (9)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2018-05 | Meridian Health Plan of Michigan, Inc., Meridian Health Plan of Illinois, Inc., and MeridianRx, LLC | WellCare Health Plans, Inc. | — |
| 2017-12 | Aetna Inc. | CVS Health Corporation | — |
| 2016-11 | Universal American Corp. | WellCare Health Plans, Inc. | — |
| 2015-07 | Cigna Corporation | Anthem, Inc. | — |
| 2015-07 | Humana Inc. | Aetna Inc. | — |
| 2015-07 | Health Net, Inc. | Centene Corporation | — |
| 2012-08 | Coventry Health Care, Inc. | Aetna Inc. | — |
| 2012-07 | AMERIGROUP Corporation | WellPoint, Inc. | — |
| 2011-10 | HealthSpring Inc. | Cigna Corporation | — |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| EV / LTM EBITDA | 8.0x | 12.6x | 33.3x | 12.5x–22.0x | $231.00–$432.00 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Discounted Cash Flow Analysis of WellCare including potential net synergies | Same methodology as standalone DCF (8.25%-9.75% discount rate, 2.0%-3.0% perpetuity growth) but including potential net synergies expected by Centene management. | $321.00–$476.00 |
| Discounted Cash Flow Analysis of Centene | Centene standalone unlevered after-tax free cash flows 2019E-2023E per Centene management, perpetuity growth of 2.0%-3.0%, discount rates of 8.0%-9.5%; compared to Centene's $54.85 closing price on March 26, 2019. | $55.00–$87.00 |
| Certain Additional Information - 52-week trading range | 52-week intraday low/high for WellCare of approximately $188 and $325 per share; for Centene approximately $50 and $74 per share (period ended March 26, 2019). Noted for informational reference only. | $188.00–$325.00 |
| Certain Additional Information - Wall Street analyst price targets | WellCare target price range of approximately $298 to $360 per share (mean $326, median $330); Centene approximately $66 to $90 per share (mean and median $77). Informational reference only. | $298.00–$360.00 |
Aggregate fee of $37.5 million; $3.75 million payable upon delivery of opinion and $33.75 million contingent upon consummation. Allen & Company received approximately $47.5 million in aggregate fees from Centene during the prior two years for unrelated services.
Opinion of Barclays to the acquirer board
Discounted cash flow assumptions
Present value as of February 28, 2019, mid-year convention; includes PV of WellCare tax attributes, less net debt. Including expected net synergies (Centene synergies forecasts): $387.25-$507.00 per share. Separate Centene DCF used 8.0%-9.0% discount rates and 1.75%-2.25% perpetuity growth, implying $58.50-$76.00 per Centene share.
Selected public companies (5)
UnitedHealth Group Incorporated · Cigna Corporation · Anthem, Inc. · Humana Inc. · Molina Healthcare, Inc.
| Multiple | Peer low | Peer median | Peer high | Range applied | Implied per share |
|---|---|---|---|---|---|
| Price / Adj. 2020E EPS (WellCare) | 8.7x | 12.7x | 14.6x | 13.0x–15.5x | $209.50–$249.75 |
| Price / Adj. 2020E EPS (Centene; implied Centene value per share) | 8.7x | 12.7x | 14.6x | 11.0x–13.5x | $52.75–$64.75 |
Selected precedent transactions (16)
| Date | Target | Acquirer | Multiple |
|---|---|---|---|
| 2017-12-03 | Aetna, Inc. | CVS Health | 12.5x EV / LTM EBITDA |
| 2016-11-17 | Universal American Corp. | WellCare Health Plans, Inc. | 33.3x EV / LTM EBITDA |
| 2015-07-24 | Cigna Corp. | Anthem, Inc. | 12.5x EV / LTM EBITDA |
| 2015-07-03 | Humana Inc. | Aetna, Inc. | 12.6x EV / LTM EBITDA |
| 2015-07-02 | Health Net, Inc. | Centene Corp. | 12.7x EV / LTM EBITDA |
| 2012-08-20 | Coventry Health Care, Inc. | Aetna Inc. | 8.1x EV / LTM EBITDA |
| 2012-07-09 | Amerigroup Corp. | WellPoint, Inc. | 16.2x EV / LTM EBITDA |
| 2011-10-24 | HealthSpring, Inc. | Cigna Corp. | 8.0x EV / LTM EBITDA |
| 2007-03-12 | Sierra Health Services, Inc. | UnitedHealth Group, Inc. | 11.0x EV / LTM EBITDA |
| 2005-09-27 | WellChoice, Inc. | WellPoint, Inc. | 12.6x EV / LTM EBITDA |
| 2005-07-06 | PacifiCare Health Systems, Inc. | UnitedHealth Group, Inc. | 15.8x EV / LTM EBITDA |
| 2004-10-14 | First Health Group Corp. | Coventry Health Care, Inc. | 6.5x EV / LTM EBITDA |
| 2004-04-26 | Oxford Health Plans LLC | UnitedHealth Group, Inc. | 8.6x EV / LTM EBITDA |
| 2003-10-27 | Mid Atlantic Medical Services LLC | UnitedHealth Group, Inc. | 13.4x EV / LTM EBITDA |
| 2003-10-27 | Wellpoint Health Networks, Inc. | Anthem, Inc. | 11.1x EV / LTM EBITDA |
| 2002-04-29 | Trigon Healthcare, Inc. | Anthem, Inc. | 13.0x EV / LTM EBITDA |
| Multiple | Low | Median | High | Range applied | Implied per share |
|---|---|---|---|---|---|
| P / NTM EPS | 13.0x | 20.7x | 29.4x | 20.0x–26.0x | $285.00–$370.50 |
| EV / LTM EBITDA | 6.5x | 12.6x | 33.3x | 13.0x–16.5x | $238.00–$310.50 |
Other analyses
| Analysis | Summary | Implied per share |
|---|---|---|
| Discounted Cash Flow Analysis of WellCare including expected net synergies | Same 8.0%-9.0% discount rates and 2.5%-3.0% perpetuity growth applied to Centene synergies forecasts added to WellCare standalone equity value range. | $387.25–$507.00 |
| Discounted Cash Flow Analysis of Centene | Centene unlevered free cash flows for ten months ending 12/31/2019 and FY2020-FY2023 per Centene forecasts, discount rates 8.0%-9.0%, perpetuity growth 1.75%-2.25%, less net debt as of February 28, 2019. | $58.50–$76.00 |
| Historical Trading Performance Analysis | WellCare 52-week low/high closing share prices as of March 26, 2019 of $190.00 and $322.00; Centene $50.25 and $73.50. Informational only. | $190.00–$322.00 |
| Equity Analyst Target Prices Analysis | Price targets from 19 analysts covering WellCare ranged $298.00-$360.00 (median $330.00); 21 analysts covering Centene ranged $66.00-$90.00 (median $77.00). Informational only. | $298.00–$360.00 |
| Transaction Premiums Paid Analysis | 1-day premiums in selected precedent transactions ranged 9.4%-43.0% (mean 23.8%, median 22.7%); 52-week high premiums ranged (25.1%)-38.4% (mean 12.8%, median 13.1%). Applied illustrative 1-day premium range of 12.0%-45.0% to WellCare's March 26, 2019 closing price. Informational only. | $259.00–$335.25 |
| Illustrative Value Creation Analysis | Compared Centene standalone DCF midpoint equity value to Centene holders' ~71% share of illustrative pro forma combined equity value of $43,857 million; the $30,994 million attributable to Centene holders exceeded the standalone midpoint by approximately $2.9 billion, or 10.2%. Informational only. | — |
| Illustrative Future Stock Price Analysis | Applied NTM adjusted P/E multiples of 11.4x (Centene) to 12.8x (average of Centene and WellCare multiples) to FY2020-FY2022 NTM adjusted EPS; combined pro forma company value per share exceeded Centene standalone by 5%/8%/9% at 11.4x and 18%/21%/23% at 12.8x for 2020E/2021E/2022E. Informational only. | — |
Engagement letter dated March 23, 2019. $3,750,000 opinion fee paid on delivery, not contingent on conclusion or consummation; additional $37,500,000 payable on completion against which the opinion fee is credited (total $37.5 million). Barclays affiliates provided an $8.35 billion senior unsecured bridge facility; estimated up to approximately $62 million in financing-related fees. Barclays received approximately $20-$25 million from Centene for other services since January 1, 2017.
Management projections
| Projection year | Year 1 | Year 2 | Year 3 | Year 4 | CAGR |
|---|---|---|---|---|---|
| Revenue | $30B | $33B | $36B | $40B | 9.8% |
| Revenue growth | 12.3% | 9.6% | 10.2% | 9.7% | |
| EBITDA | $1.5B | $1.7B | $1.8B | $2.1B | 10.4% |
| EBITDA growth | 32.2% | 9.2% | 11.1% | 11.1% | |
| EBITDA margin | 5% | 5% | 5% | 5% | |
| Implied EV / EBITDA | 11.0x | 10.0x | 9.0x | 8.1x |
Year-1 growth is against LTM at announcement ($27B revenue, $1.2B EBITDA); later years are year over year.
Centene management prepared standalone forecasts for FY2019E-FY2023E showing total revenue growing from $70,756 million in 2019E to $102,145 million in 2023E, EBITDA from $3,318 million to $5,404 million, adjusted diluted EPS from $4.21 to $6.22, and unlevered free cash flow from $1,663 million to $2,303 million; Centene also prepared synergies forecasts of approximately $500 million pre-tax net synergies in 2021 (with ultimate annual run-rate net synergies of more than $700 million, which advisors were directed not to rely on). WellCare management prepared standalone forecasts for 2019-2023 with total revenue of $26,762 million in 2019 rising to $39,825 million in 2023, adjusted EBITDA of $1,152 million to $2,052 million, and adjusted EPS of $13.50 to $22.52, plus standalone cash flow forecasts (unlevered FCF of $(320) million in 2019 to $899 million in 2023). WellCare also prepared pro forma combined company forecasts assuming $250 million of synergies in 2020 and $500 million thereafter (with $250 million of implementation costs in each of 2020 and 2021), with pro forma revenue of $97,518 million in 2019 to $141,970 million in 2023.
Process notes
Other Managed Care fairness opinions
- Dental Care Plus Group / DentaQuest 2019 · 10.4x EV/EBITDA
- Express Scripts Holding / Cigna 2018 · 11.6x EV/EBITDA
- Magellan Health / Centene 2021 · 15.6x EV/EBITDA
- Aetna / CVS Health 2017 · 12.1x EV/EBITDA
- Apollo Medical Holdings / Network Medical Management 2016
- Universal American / WellCare Health Plans 2016 · 9.3x EV/EBITDA
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