Anthem, WellPoint Shares Retreat
Shares of Anthem Inc. and WellPoint Health Networks Inc. fell Monday over concerns that legal battles could delay Anthem’s planned $17-billion acquisition of the Thousand Oaks company.
Trading in both stocks was halted Friday shortly before California Insurance Commissioner John Garamendi rejected WellPoint’s proposed sale of its Blue Cross Life & Health subsidiary to Anthem.
That Blue Cross unit is a small part of the company. But Garamendi’s decision threw into doubt the entire acquisition, which would create the nation’s largest health insurer, with more than 27 million members.
Shares of Anthem and WellPoint fell sharply when they resumed trading, recovering in the afternoon. WellPoint shares fell $4.57, or 4%, to close at $105.21, and Indianapolis-based Anthem fell 64 cents to $88.16. Both trade on the New York Stock Exchange.
Garamendi was the last regulator to weigh in on the acquisition and the only one to reject it. The deal has been approved by regulators in nine other states and Puerto Rico. California’s Department of Managed Health Care, whose jurisdiction covers 90% of WellPoint’s business in the state, also approved it.
Credit Suisse First Boston analyst Patrick Hoylo remained confident that the acquisition would close. But he said Monday’s sell-off suggested that not everyone agreed. Wall Street collectively believes “there is somewhere between a 50% and 75% chance that this deal ultimately goes through,” Hoylo said. “I believe the probability of it is a lot higher ... probably 90%.”
Analysts said the decline of the shares Monday also reflected moves by arbitragers to profit from the spread between what they paid for WellPoint shares and the value of their post-acquisition conversion into Anthem shares.
Under terms of the deal announced in October, Anthem would pay $23.80, plus one share of stock, for every WellPoint share.
Officials at both companies declined Monday to comment on their next move.
On Friday, WellPoint and Anthem said they would consider filing suit in California Superior Court, contending that Garamendi had abused his discretion and should be ordered to reverse his decision.
The Anthem-WellPoint deal has drawn the opposition of consumer advocates, doctors, lawmakers and large pension funds. One complaint has been that WellPoint executives would receive up to $600 million in severance and retention payouts once the deal closed.
Garamendi said last week that state law gave him the power to block the transfer of insurance company operating licenses if the change would adversely affect policyholders. Garamendi believes the $3.4 billion in debt Anthem needs to close the deal would unfairly burden California policyholders with higher premiums.
Hoylo expects the companies to go to court as early as this week. He said Anthem and WellPoint would have a 70% chance of winning, based on his reading of a 1998 California Supreme Court ruling on the power of state agencies to exercise “independent judgment.”
Analysts said the two companies could renegotiate the deal to avoid Garamendi’s jurisdiction by selling off the life insurance unit or putting it in a trust until the legal dispute is resolved.
“All of the options for the companies involve legal gymnastics and will likely take time,” Prudential Equity Group analyst David Shove said in a research note.
