PacifiCare Health Systems Inc. said Wednesday that it would buy American Medical Security Group Inc. for $502 million to expand its presence in the small-group health insurance market.
Cypress-based PacifiCare, the largest manager of U.S. Medicare health plans, will pay shareholders of Green Bay, Wis.-based American Medical $32.75 a share in cash, a 41% premium on Tuesday's closing price of $23.24. PacifiCare also will assume about $30.2 million of American Medical's debt.
PacifiCare said the deal would expand its commercial medical enrollment about 13%, adding 314,000 preferred provider organization members and grow its geographic presence from eight to 33 states and Washington, D.C.
As a result of the deal, PacifiCare Chief Executive Howard Phanstiel raised the firm's 2005 net income forecast. Phanstiel expects PacifiCare to earn $360 million to $375 million, up from previous guidance of $350 million to $360 million.
"It's a very smart move by management" at PacifiCare, said Patrick Kaser, a senior analyst for Brandywine Asset Management, which owned about 650,000 shares of PacifiCare as of June, according to Bloomberg data. "They're buying a company with commercial expertise they didn't have, and it gives them a nice geographic footprint from which they can expand their Medicare Advantage business."
The news drove up PacifiCare shares 5.6% to $36.32, up $1.92, while American Medical shares jumped $8.67, or 37.3%, to $31.91. Both trade on the New York Stock Exchange.
American Medical, which had $744 million in revenue last year, has about 1,400 employees and provides coverage through 32,000 independent agents.
The deal "gives PacifiCare broker connections in a lot of states where they had no connections," Kaser said.
It will also help PacifiCare reduce its reliance on Medicare, company spokeswoman Cheryl Randolph said. Senior plans account for 48% of PacifiCare's revenue, a percentage the company would like to shrink.
"We have been looking at acquisitions, particularly ones that will grow our commercial business," Randolph said, including lucrative low premium, high deductible PPO plans and healthcare savings accounts.
Bloomberg News was used in compiling this report