UNH Partly Completes Amil's Buy

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After receiving approval from ANS – the Brazilian Healthcare Regulatory Agency – and purchasing approximately 60% of Brazil-based Amil Participações S.A.’s  outstanding shares from controlling shareholders and management, UnitedHealth Group Inc. (UNH) completed first lap of the latter’s  buyout.  UnitedHealth had announced the purchase of Amil earlier in October this year.

UnitedHealth expects to complete the second part of the transaction, which involves buying approximately 30% of the Amil’s shares from public shareholders, by the first half of 2013.

The acquisition is a strategic step by the company to expand its international business. The purchase will cost approximately $4.9 billion in cash.

Amil Participações S.A. is the biggest Latin America healthcare company of Brazil, serving more than 5 million people via its vast delivery network of 22 hospitals and approximately 50 clinics.  Its care network includes 44,000 doctors, 3,300 hospitals, nearly 11,000 outpatient clinics and 12,000 ancillary service facilities.

Although the acquisition will slightly be accretive to UnitedHealth’s 2013 earnings, it will increase the company’s financial leverage ratio to around 36%. However, this ratio will eventually trend downwards.
 
Upon the closure of the buyout, Amil’s founder, Dr. Edson Bueno, will remain its chairman and CEO. He will also take place in UnitedHealth Group’s Board of Directors.

In addition to this, the veterans in Amil’s leadership team will retain their positions. Further, Amil’s CEO will invest nearly $470 million in shares of UnitedHealth Group and will hold the shares for five years.
    
This big acquisition marks a strategic move by UnitedHealth, indicating aggressive international expansion at a time when growth in the domestic markets is facing pressures from the new regulations.

UnitedHealth is particularly attracted towards the Brazilin insurance industry and has been experiencing healthy growth as a result of improving economic conditions and the loosening of market regulations in the country. The region is expected to create a huge demand for private insurance as a low unemployment and rising income compel people to spend more on better quality healthcare needs offered by private insurance companies.   As of March 2012, only 25.1% of the Brazilian population was enrolled in private healthcare plans or had private health insurance. The remainder of the population relied on public healthcare services.

United Health has cherry-picked Amil keeping in mind the robust sales growth posted by the latter.  Amil has posted strong revenue, which grew 17.9% year over year in first half of 2012. Total membership also increased by 4.9% year over year over the same time period.

We expect to see more health insurers showing their interest in the Brazilian insurance market, since it is the largest in South America, and offers the potential to become a more prominent international insurance market. Recent economic stability, positive credit trends, and regulatory reforms that have stabilized the currency and promoted domestic savings, produced sound growth across the insurance industry in Brazil.

UnitedHealth’s peers that are looking to expand internationally include Aetna Inc. (AET), CIGNA Corp. (CI).

UnitedHealth currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term ‘Neutral’ recommendation on its shares.  
 

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