Aetna to buy Coventry, expand Medicare/Medicaid business

(Reuters) - Health insurer Aetna Inc said on Monday that it would buy rival Coventry Health Care Inc for $5.6 billion to increase its share of U.S. government-backed Medicare and Medicaid business.

The purchase, which will add more than 5 million members to Aetna's ranks, comes just weeks after rival WellPoint Inc struck a deal to buy Amerigroup Corp in a major expansion of its Medicaid business, administering the government's health plan for the poor.

Bankers and investors see the wave of health insurer consolidation accelerating further as the United States moves to implement President Barack Obama's healthcare overhaul.

The U.S. health reform law aims to provide coverage for 16 million more Americans through privately run insurance exchanges in each state and will expand Medicaid eligibility for an additional 16 million people by raising limits on household income.

"Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing government sector and expand our relationships with providers in local geographies," Aetna Chief Executive Officer Mark Bertolini said in a statement.

Under the deal, Aetna will pay $42.08 per share - $27.30 in cash and 0.3885 of its common shares. That is a 20.4 percent premium over Coventry's closing stock price of $34.94 on Friday.

Aetna said the purchase would help lift its share of revenue from its government business to more than 30 percent from 23 percent.

It will help Aetna add nearly 4 million medical members and 1.5 million Medicare Part D members. Medicare Part D is a federal program that reduces prescription drug costs for beneficiaries of the government plan for the elderly.

Shares of Coventry rose above the offer price, gaining 21 percent to $42.36 in premarket trading on Monday.

Including the assumption of Coventry debt, the sale is valued at $7.3 billion, the companies said.

Aetna said it planned to finance the cash portion of the transaction with a combination of cash on hand and by issuing about $2.5 billion of new debt and commercial paper.

The company said it expected the deal to add modestly to operating earnings per share in 2013, 45 cents per share in 2014 and 90 cents in 2015.

Aetna shares closed at $38.04 on Friday on the New York Stock Exchange.

In July, WellPoint said it would buy rival Amerigroup for $4.46 billion, nearly doubling its Medicaid business.

Last October, Cigna Corp agreed to buy HealthSpring Inc for $3.8 billion to strengthen its Medicare business.

(Reporting by Adithya Venkatesan and Anil D'Silva in Bangalore; Editing by Rodney Joyce, Roshni Menon)

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