Health Insurer Centene to Acquire Magellan in $2.2 Billion Deal; Target Price $79

Centene, a diversified multi-national healthcare enterprise, said it will acquire Magellan Health for $95 per share in cash for a total enterprise value of $2.2 billion as the Fortune 500 company is looking to scale its mental health services at a time when Americans struggle with mental health issues associated with the COVID-19 pandemic.

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, the company noted in the statement.

The deal is expected to complete in the second half of this year.

Centene shares rose 1.45% to $60.90 in pre-market trading on Monday. However, the stock fell over 4% in 2020.

Centene Stock Price Forecast

Thirteen analysts who offered stock ratings for Centene in the last three months forecast the average price in 12 months at $79.15 with a high forecast of $94.00 and a low forecast of $68.00. The average price target represents a 31.85% increase from the last price of $60.03. From those 13 equity analysts, eleven rated “Buy”, two rated “Hold” and none rated “Sell”, according to Tipranks.

Morgan Stanley gave a base target price of $94 with a high of $135 under a bull scenario and $55 under the worst-case scenario. The firm currently has an “Overweight” rating on the health insurer’s stock.

Several other analysts have also recently commented on the stock. Truist Securities lowered the target price to $80 from $85. Deutsche Bank decreased the target price to $77 from $83. Stephens cuts target price to $69 from $71. SVB Leerink lowered the target price to $73 from $75. Jefferies cuts target price to $75 from $78.

Analyst Comments

“Centene is the largest Medicaid player with 21% market share. Wellcare acquisition will expand Centene market presence into Medicare Advantage, the fastest-growing market. Since acquisition announcement, standalone Wellcare has outperformed suggesting potential upside to deal accretion based on S-4 estimates (breakeven in Y1 and mid-single-digit accretive in Y2),” noted Ricky Goldwasser, equity analyst at Morgan Stanley.

“Additional upside opportunities from insourcing PBM and the integration of medical and pharmacy benefit. While ACA repeal would be a headwind, we assign a low probability to this outcome.”

Upside and Downside Risks

Risks to Upside: Deal with WCG drives accelerated growth in Medicare Advantage. CNC wins new Medicaid contracts. ACA margins perform at high end of 5%-10% target. RxAdvance grows into a big market pharmacy player. WCG 2019 outperformance drives upside to pro forma EPS -highlighted by Morgan Stanley.

Risks to Downside: Regulatory uncertainty. Loss of core Medicaid contracts. Exchange profitability is less than expected. Medicaid disenrollment.