By Michael Erman and Tamara Mathias
(Reuters) - U.S. health insurer Centene (NYSE:CNC) Corp on Wednesday said it would buy smaller rival WellCare Health Plans Inc for $15.27 billion in stock and cash, in a move to bulk up its government-backed Medicare and Medicaid businesses while reducing exposure to Obamacare healthcare exchanges.
Shares of WellCare jumped 9.8 percent to $253.98. Centene shares fell about 7.5 percent to 50.71.
The announcement comes days after the Trump administration stepped up its opposition to former President Barack Obama's signature healthcare law. The Department of Justice (DOJ) on Monday said it believes the Affordable Care Act (ACA), popularly known as Obamacare, violated the U.S. Constitution and that the law should be struck down.
Centene relies on its Obamacare business for about 40 percent of its earnings, making it among the most vulnerable companies should the law be overturned, according to SVB Leerink analyst Ana Gupte.
The combined company will have 22 million members, up from around 14 million for Centene at the end of 2018.
"The more we can grow in this area, the better the recipients are, the better for the investors ... And there are other very large competitors out there," Centene Chief Executive Michael Neidorff said on a conference call. Neidorff will remain CEO of the combined company.
It will have a Medicaid business in 22 states, covering more than 11 million lives, according to Jefferies data. That represents a more than 50 percent increase for Centene.
Since the beginning of 2014, when Obamacare's Medicaid expansion began taking effect on a significant scale, shares of both companies have surged. Centene's shares are up around 272 percent, while WellCare shares rose around 228 percent.
The two companies Medicaid businesses currently have significant overlap in Illinois, Florida, Georgia and Missouri, according to Jefferies.
The deal is expected to close in the first half of 2020, the companies said. They forecast around $500 million in cost savings from the deal in the second year after it closes.
The deal, including debt, was valued at $17.3 billion. The offer price of $305.39 per share represents a premium of about 32 percent to WellCare's closing price on Tuesday.
Under its terms, WellCare shareholders will get 3.38 shares of Centene common stock and $120 for each WellCare share, giving them about 29 percent ownership of the new company.
Centene's planned acquisition of WellCare continues a wave of consolidation in U.S. healthcare, coming after two large health insurers combined with the two largest U.S. pharmacy benefit managers in deals that closed last year.
In those deals, CVS Health Corp (NYSE:CVS) bought Aetna Inc (NYSE:AET) for $69 billion, while Cigna Corp (NYSE:CI) acquired Express Scripts (NASDAQ:ESRX) Holding Co for $54 billion.