Analyst recommends WellPoint credit amid growth, profits

By Ronda Fears

Hashville, Tenn., Feb. 12 - WellPoint Health Networks (Baa1/A-) continues to demonstrate strong operating results amidst an aggressive growth plan through acquisition, which leads Kathy Shanley, senior bond analyst at Gimme Credit, an independent research firm, to continue to recommend the credit. WellPoint has a 0% convertible bond due 2019 (Baa2/BBB+) outstanding.

"WellPoint is in a hurry to expand its national reach among Blue Cross Blue Shield plans. It announced the CareFirst deal before the ink was even dry on the RightCHOICE merger, but said at the time it could take 18 months or more to complete the deal since CareFirst needed first to convert from nonprofit to for-profit status," Shanely said in a report Tuesday.

"For bondholders, however, we wouldn't see a delay in the CareFirst merger as a bad thing, since WellPoint already is busy integrating its other recent transactions. We would continue to recommend the purchase of this credit."

On Monday, WellPoint reported fourth quarter net income rose to $110 million, up 23% over last year. Membership ended the year at 10.1 million, up from 7.9 million a year ago, reflecting the purchase of Blue Cross Blue Shield of Georgia last year. WellPoint's operating cash flow for the fourth quarter totaled $360 million.

At Jan. 31, WellPoint completed its previously announced merger with Missouri-based RightCHOICE and still on deck is the CareFirst Blue Cross Blue Shield merger transaction, which is being put under the microscope by Maryland state legislators. Excluding the Georgia acquisition, growth in new members increased at a more modest 3% year-over-year rate. RightCHOICE, which reported its earnings separately from WellPoint, said net income climbed to $17 million, up from about $11 million the prior year, with member count increasing to 3 million, from 2.7 million.

Cash flow helped WellPoint lower its debt to capital ratio from 34% just after the Georgia acquisition was completed to 28% at yearend. Although WellPoint subsequently issued $350 million in debt in January to fund the RightCHOICE deal, Shanley doesn't expect first quarter debt-to-capital ratios will be materially altered from year-end levels. With its share price trending up, WellPoint recently said the cash portion of its merger deal with RightCHOICE was undersubscribed, although under the terms of the transaction, WellPoint required 30% of the RightCHOICE shares to be converted into cash. The total consideration for the deal amounted to about $1.4 billion at the closing, including about $375 million in cash, plus 8.3 million shares valued at roughly $1.05 billion.

The delay in adding CareFirst, Shanley said, may be needed to overcome the reservations of many of CareFirst's stakeholders in Maryland, its largest market. Last week, the Maryland House of Delegates passed a bill that, if signed into law, would require CareFirst to prove the merger with WellPoint benefits state residents. Coincidentally, on Monday, Indiana-based Anthem, Inc., which completed its IPO last year, said the Kansas Insurance Commissioner blocked its plan to acquire Blue Cross and Blue Shield of Kansas, which like RightCHOICE, had hoped to do a conversion from nonprofit status, Shanley said.

"We think it's too early to predict how the CareFirst situation will turn out, but at a minimum we wouldn't be surprised to see WellPoint sweeten its bid to make the transaction more palatable to legislators. With Enron casting a pall over anything smelling even vaguely like deregulation, it may be more challenging than WellPoint had previously expected to win approval for the deal," the analyst said in the report.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.