Humana to Buy Concentra - Analyst Blog

Amidst the concerns regarding funding cuts and the impact of the U.S. health care reform, Humana Inc. (HUM) has agreed to acquire Concentra, Inc. for $790 million in cash, to diversify and expand its footprint into medical services nationwide.

Concentra is a private health care company based in Addison, Texas, which provides occupational medicine, urgent care, physical therapy and wellness services. Further, it produces approximately $800 million of revenues annually from 240 workplace health-care facilities and more than 300 medical centers in 42 states.

The deal is expected to close in December, 2010 and add slightly to Humana's earnings by the end of December 31, 2011, though the regulatory approval is still pending.

Humana believes that the acquisition of Concentra will increase Humana's focus on its core businesses as a health care provider, besides providing revenue diversification and opportunities for strategic expansion over the longer term. Additionally, Concentra will provide access to Humana's medical members in their certain geographic areas.

The revenue diversification enjoyed by Humana will also help the company in reducing its exposure to health care overhaul regulations, as the health law compresses the insurer's profits from selling benefits.

Besides, Humana will also benefit from Concentra's focus on evidence-based, cost-effective medical care and a service-driven culture.

Following the acquisition announcement, the rating agency A.M. Best Co. reiterated its financial strength ratings, issuer credit ratings and debt ratings of Humana and its insurance and health maintenance organization subsidiaries. The outlook for all ratings remained stable.

The rating agency also stated that Humana's financial leverage will not be affected by the acquisition, and the liquidity of the parent company will be sufficient after the acquisition.

Apart from Humana, its competitor Cigna Corporation (CI) remains on track to grow its international business, and UnitedHealth Group Inc. (UNH) is focussed on earning revenues from several segments outside health insurance coverage.

In the past five years, Humana has announced 11 pending or completed acquisitions. With the acquisition of Concentra, Humana will gain new opportunities in the growing part of health care.

Also, Humana has launched a Medicare Part D prescription drug plan (PDP) on October 1 with Wal-Mart Stores Inc. (WMT) to provide Medicare beneficiaries including seniors and the disabled to save more than $450 on average in 2011 on premiums, prescription medication co-payments and cost-shares than the drug plans in 2010. Humana is one of the largest Medicare providers for the elderly.

We believe that with the launch of Humana-Walmart PDP, the company will be able to provide an affordable prescription solution to desired individuals, by enhancing its membership in prescription coverage plans and boost its mail-order drug business.

However, Humana has lowered its 2011 earnings forecast to $5.35-$5.55 per share on November 19, down from the 2010 expectation of $6.40-$6.50. Humana's guidance for the years ending December 31, 2010 and December 31, 2011 will exclude the impact of this pending transaction.

Nevertheless, Humana is positive about its Medicare Advantage program to grow over the longer-term due to the healthcare overhaul passed in March 2010, which includes about $455 billion in spending cuts for Medicare and other federal health programs over the next 10 years.