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Nov
8

First Health and Coventry

The latest information on the Coventry acquisition of First Health may provide a sense for the future of the merged entity.
Item 1.
Profits at First Health are down, ostensibly due to “merger related charges” and steep declines in revenues from FH’s MailHandler’s employee benefit program.
The MailHandler’s program is a federal employee health benefit plan, formerly administered by CNA Insurance. Several years ago FH won the contract, taking it from CNA (who happened to be a FH customer at the time). It accounts for a significant portion of FH’s topline (revenue).
Item 2.
Coventry EVP Tom McDonough has been named to oversee the integration of FH and Coventry. McDonough joined Coventry from UnitedHealthGroup, where he was responsible for their large, multi-state employer groups. Clearly, this experience is highly relevant to FH’s present market mix.
Item 3.
Several years ago, UnitedHealthCare divested itself of its’ Workers’ Comp entities, specifically Focus Healthcare and MetraComp, after the MetraHealth acquisition. McDonough was at United at the time, as were other current Coventry executives (e.g. Harve DeMovick, now CIO).
Item 4.
Coventry and FH stock prices have not fared well since the acquisition announcement. The Motley Fool, long a critical observer of FH management, had this to say just after the announcement:
“No sooner had the buyout news gone out than 11% of Coventry’s market capitalization vanished, and McGraw-Hill’s (NYSE: MHP) Standard & Poor’s placed Coventry on its watchlist for a possible debt-rating downgrade. The reason: Coventry may be overpaying for this underperforming business. Coventry plans to pay for its purchase roughly half in stock (at a 0.1791:1 exchange rate) and half in cash ($9.375 per share of First Health). At Coventry’s Wednesday closing price, that would value First Health at $18.75 per share, imputing a valuation of $1.7 billion to First Health. Factoring in Coventry’s own share price decline in response to the deal’s announcement, however, brings the agreed value of First Health shares down closer to yesterday’s close — about $17.70.”
Currently, Coventry’s stock price remains significantly below the pre-acquisition level (from $53.50 to $44.01 today). I doubt either Coventry or FH management are terribly pleased with this…
One of the criticisms advanced by analysts is the potential for Coventry management (which is highly respected) to become distracted by the merger and the non-core FH business – PPO, Workers’ Comp, etc.
Net is this – if the Coventry stock price continues to languish, expect to see a “return to the core” – perhaps spinoff of some of the non-core assets.


Joe Paduda is the principal of Health Strategy Associates

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