A downturn in the market during the fourth quarter of 2018 helped Centene score a better price for WellCare Health Plans, a purchase the companies expect to close in the first half of 2020.
The deal price fluctuated widely over the seven months of negotiations, reaching as high as $380 per share, consisting of as much as 55% cash with the rest being shares of Centene common stock, according to the companies' joint proxy statement filed last week.
By the time the companies reached a merger agreement in late March, Centene and WellCare had settled on a lower final price that valued WellCare at about $312 per share and consisted of less cash. The price, which will continue to fluctuate with the market, is made up of $120 in cash and 3.38 Centene shares for each WellCare share. It reflects a premium of about 35% to WellCare's closing price on March 26, the day the two companies signed the merger agreement.
Ana Gupte, managing director at investment firm SVB Leerink, said a pullback in the managed-care market and WellCare stock more specifically helped Centene in its negotiations. Health insurers' share prices generally fell during that quarter, in large part because of a federal judge's decision to strike down the entire Affordable Care Act as unconstitutional, she said. WellCare's earnings guidance for 2019 also disappointed investors. Gupte said in a research note last week that the price of the deal was "a solid result for Centene" despite the market downturn.
Over the course of the fourth quarter, WellCare's share price reached a low of $221 in late December, down 31% from its share price of $322 at the start of that quarter. It has since rebounded to $272 per share at Tuesday's close. Meanwhile, Centene's share price also fell to a low of $55 during the fourth quarter, down about 25% from Oct. 1. It closed Tuesday at about $56.
St. Louis-based Centene was able to capitalize on that market downturn. Centene CEO Michael Neidorff first approached WellCare Chairman Christian Michalik in person about a possible acquisition of WellCare on Sept. 4, 2018. A little more than a week later, Centene sent a letter to WellCare proposing to buy the company for $350 per share, composed of half cash and half stock. The proposal reflected a premium of 16% to WellCare's closing price and implied that WellCare's stockholders would own about 23% of the combined company.
That was the first of many pitches, and WellCare turned it down for being "not sufficiently attractive," according to the proxy.
After some back and forth and discussions about synergies and regulatory considerations, Neidorff in late October proposed a deal at $380 per share with a cash component of 55%. That price, he said, would allow the combined company to pursue other strategic opportunities. WellCare decided the price was attractive enough to start due diligence and merger agreement negotiations.
But just a few days later on Oct. 31, Neidorff put talks on ice amid a market decline that saw both Centene and WellCare trading at lower prices. Both would continue to decline during the quarter, reaching their low points on Dec. 24.
The companies starting talking again in January 2019. That month, Neidorff and WellCare Chairman Michalik met at the J.P. Morgan Project Japan Conference in San Francisco where Neidorff said he again wanted to try exploring a merger, despite the stock market volatility. Centene later that month sent WellCare a letter proposing an implied purchase price of $315 per share, with 35% in cash and 65% in shares—a much lower price than proposed less than two months before. It reflected a premium of 19% to WellCare's closing stock price on Jan. 19.
The WellCare board wasn't satisfied and by mid-February negotiated to get the price per share up to $343 with the same mix of cash and stock. But WellCare's and Centene's share prices sunk further as health insurers' stocks tumbled as lawmakers explored the possibilities for Medicare for All. WellCare's share price sunk to $241 per share on March 15 from $274 on Feb. 15, while Centene's share price decreased to $59 from $64, according to the proxy.
Ultimately in March, WellCare agreed to a price that valued the insurer at about $313 per share, with $120 in cash and 3.38 Centene shares for every WellCare share. The deal gave WellCare stockholders 29% ownership in the combined company and two board directors at the combined company. They announced the merger publicly on March 27.