Why a PBM Acquisition Is Taking UnitedHealth to All-Time Highs

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UnitedHealth Group Inc. (NYSE: UNH) is making a $12.8 billion acquisition. Investors are used to seeing an acquirers’ shares fall when they announce mergers, but this deal is quite different. UnitedHealth shares are hitting all-time highs on the news.

Catamaran Corp. (NASDAQ: CTRX) is a provider of pharmacy benefit management (PBM) services and technology solutions. The company announced on Monday morning that it has agreed to combine with OptumRx, which is UnitedHealth’s free-standing pharmacy care services business.

Catamaran shares were up 24% at $60.11 on the news, hitting an all-time high as well. The company said that the agreement will result in an all-cash buyout price of $61.50 per share in cash. The press release indicated that this merger will also close sometime during the fourth quarter of 2015, subject to Catamaran shareholder approval and regulatory approvals.

As noted, acquiring companies often see their shares fall on news of a buyout. The reason that UnitedHealth is rising is that the company projected that this acquisition is expected to be accretive to UnitedHealth’s net earnings in 2016. It sees the acquisition adding around $0.30 in earnings per share in 2016.

UnitedHealth Group is the largest health insurance provider. It is also a Dow Jones Industrial Average component. The company said that it will finance the acquisition from existing cash resources and also from new debt.

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The company affirmed its $6.00 to $6.25 per share earnings outlook. Thomson Reuters has a consensus estimate of $6.20 per share for 2015, but the estimate for 2016 is $7.01 — so that means that 2016 earnings per share could be another $0.30 or so higher, if the projections live up to expectations. UnitedHealth did say that its outlook assumes the absorption of all merger costs, the ongoing commitment to advance its dividend policy as planned and a continued but moderated level of share repurchase.

It appears as though at least one of the class action law firms has already announced an investigation into the price. The firm Tripp Levy said:

Our investigation has determined that the offer price of only $61.50 per share unfairly under-values the true going forward inherent value of Catamaran and that shareholders are not receiving the maximum value for their shares.

Here is what has enticed UnitedHealth to do this deal, according to its press release:

Both companies have distinctive, rapidly growing specialty pharmacy services businesses. The combined organization will help customers manage the complex costs and outcomes as this portion of the pharmaceutical market expands from an estimated $100 billion in revenues in 2014 to potentially $400 billion annually by 2020.

So far, the first analyst note that has come this way is from Sterne Agee’s Brian Wright. The firm has only a Neutral rating, but it talked up the deal by saying:

The acquisition makes tremendous strategic sense as the PBM business is a scale business and drives Optum’s revenue mix. We believe purchase scale efficiencies are the main driver behind the expected ’16 $0.30 in EPS accretion with administrative efficiencies likely to be passed along to customer, which should drive meaningful market share gains for the combined entity.

UnitedHealth shares were up 4% at $122.70 shortly after the opening bell on Monday. Its new 52-week range is $73.61 to $123.76, and the consensus analyst price target is $127.19.

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