Centene Corporation and Magellan Health have entered into a definitive merger agreement under which Centene will acquire Magellan Health for $2.2 billion.
The transaction, which was unanimously approved by the Boards of Directors of both companies, is expected to broaden Centene's whole health capabilities and establish a leading behavioral health platform. The combined platform lays the foundation by which the company will continue to invest for its members, ostensibly enabling improved health outcomes and faster growth, the companies said.
The combination brings together the companies' complementary capabilities in behavioral health, specialty healthcare and pharmacy management. As a result of the transaction, Centene will establish one of the nation's largest behavioral health platforms across 41 million unique members with enhanced capabilities.
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Magellan Health will also add to Centene's leadership in government sponsored healthcare, bringing 5.5 million new members on government-sponsored plans. Magellan also provides specialty health services for 18 million third-party customer members in addition to Centene's own members.
The transaction also adds 2 million PBM members and 16 million medical pharmacy members, enhancing the scale of Centene's pharmacy platform with capabilities in specialty drug management. As part of Centene's Health Care Enterprises, Magellan will continue to independently support its existing customers and pursue growth opportunities. The transaction is also expected to create attractive shareholder returns through enhanced service capabilities, cross-sell opportunities and increased engagement with third-party customers.
WHAT'S THE IMPACT?
Ultimately, the deal is expected to have several strategic and financial benefits, which come at a critical time, with more than two in 10 Americans struggling with mental or behavioral issues associated with the COVID-19 pandemic, according to the Centers for Disease Control and Prevention. Additional research shows that the sickest 5% of the population accounts for 50% of healthcare spending, which can be partially addressed by Megallan's behavioral health, specialty health and pharmacy offerings.
The transaction also brings additional scale in Centene's specialty care division and complements its evolving Health Care Enterprises portfolio, aligned with delivering newer technologies and services across the full spectrum of its members.
The companies said the deal will enable better health outcomes at lower total medical costs via integrated solutions, and create opportunities to grow Centene's specialty care business with enhanced services, new product development and additional third party relationships.
Centene expects the transaction to deliver $50 million in annual net cost synergies projected by the second full year. The net synergies are in addition to the cost-reduction plan of $75 million already initiated by Magellan.
Ken Fasola, CEO of Magellan Health, and other members of Magellan Health's leadership team have agreed to join Centene to provide continuity.
Centene intends to primarily fund the cash portion of the acquisition through debt financing, and J.P. Morgan has provided a $2.381 billion bridge-financing commitment. Upon closing, Centene expects its debt-to-capital ratio to be in the low 40% range, and intends to use its strong earnings and cash flows to achieve its targeted debt-to-capital ratio in the upper 30% range within 12 to 18 months post close.
Centene and Magellan Health expect to complete the transaction in the second half of 2021.
THE LARGER TREND
So far this year, healthcare merger and acquisition activity has been down, primarily as a result of COVID-19. The second quarter of 2020 saw M&A activity drop 20% from the first quarter and 34% when compared to Q2 of 2019, according to Irving Levin Associates.
Not only were there fewer mergers and acquisitions in Q2, but the ones that did occur were worth less than those in Q1 2020 and Q2 2019, according to S&P Global Market Intelligence. The aggregate transaction value of the M&As in Q2 was $12.26 billion, compared to $29.31 billion in Q1, and $137.29 billion in the second quarter of 2019.
Despite Q2 being the lowest quarter as far as M&A activity in five years, analysts at Waller and Kaufman Hall predict that the pent-up M&A activity from the pandemic will "very likely" cause a surge of M&As moving into 2021. They predict that M&As will be particularly active among small and independent hospitals looking to partner in order to stay afloat.
Intermountain recently acquired Saltzer Health, a physician group in Idaho, in October. Last year, the system also acquired HealthCare Partners Nevada.