Healthcare and M&A are fraught with regulatory risks and US health insurer Centene’s US$3.75bn purchase of New York insurer Fidelis Care proved particularly tricky. Unlocking the regulatory process required a chunky financial settlement between the Catholic Church, Fidelis’s owner, and the State of New York.
Centene’s US$2.86bn equity raise in May, its first public sale of stock in more than a decade, proved a catalyst not only for the acquisition but to attract new shareholders able to fund growth.
“There aren’t that many large liquidity events like this,” said Russell Chong, head of healthcare ECM origination at Citigroup. “Within the larger mutual fund complexes, there were a number of new funds that participated.
“There was demand not just from healthcare-dedicated funds but also growth-oriented funds.”
Citigroup, along with Barclays, Evercore, SunTrust Robinson and Wells Fargo launched a two-day bookbuild ahead of the market open on April 30 that canvassed nearly 100 institutions. Despite the compressed marketing schedule, investor demand swelled to more than 2.5-times the 24.2m shares placed at US$107.50, an all-in 2.4% discount to the pre-launch reference.
The day after pricing, Centene shares soared to US$114.24 and closed that week at a then record-high of US$116.65. The underwriters exercised their 10% greenshoe option on 2.4m shares by the end of the week.
Centene, rated Ba1/BB+, termed out the remaining M&A consideration with a US$1.8bn eight-year high-yield bond sale the following week where funds were put in escrow until the acquisition closed in July.
Centene had expected to wrap up the purchase in the first quarter of 2018 having agreed the deal in September 2017. On that original timeline, the company was to have funded in late 2017, but political rhetoric at the time pressured valuations of healthcare insurers.
“You have to remember there was concern that [President] Trump was taking aim at the Affordable Care Act,” said Chong.
The State of New York added another political hurdle by demanding a take of the proceeds from the sale of Fidelis, holding up its blessing. Fidelis, a non-profit insurer owned by the Catholic Church, benefited from state-sponsored programmes such as Medicaid and should share a split of the profits, the thinking went.
The church agreed to pay US$1.5bn to the state and Centene added US$500m to the acquisition cost by promising at least US$160m of additional revenue and a further US$340m to the state over five years.
New York Governor Andrew Cuomo, who at one time sought to claim 80% of the US$3.75bn sale price, championed the US$2bn windfall as a victory for taxpayers. The church took US$3.2bn into its coffers, Centene gained a foothold in one of the largest US healthcare markets, investors profited, and investment banks took their take. A rare win-win-win-win-win outcome.
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