In order to expand its product portfolio, WellPoint Inc. (WLP) recently entered into an agreement with private equity firm, Fenway Partners, to acquire 1-800 CONTACTS Inc., a web- and phone-based eyewear retailer. The financial terms of the deal were not disclosed.
According to Bloomberg, the deal’s estimated value is $900 million. The acquisition is expected to be completed in the third quarter of 2012, subject to customary closing conditions and anti-trust approval under the Hart-Scott-Rodino Antitrust Improvements Act.
The transaction and integration costs associated with the acquisition will likely reduce WellPoint’s earnings per share by 4 cents. Consequently, the net income guidance has been reduced to $7.80 per share from the earlier projection of $7.84, including net investment gains of 19 cents per share in the first quarter of 2012.
Moreover, the cash balance of WellPoint is expected to decline substantially, as the company will finance the acquisition from its cash-in-hand. As of March 31, 2012, the company had cash and cash equivalents of $2.3 billion.
1-800 CONTACTS is the leading direct-to-consumer vendor of contact lenses in the United States. A strong brand name and customer-focused approach are the company’s unique selling proposition. The company believes in providing easy access to affordable products via various platforms, such as Internet, phones, mail and fax.
The acquisition marks WellPoint’s initial foray into products beyond health insurance. It will not only diversify the company’s existing businesses to include eyewear, but is also expected to substantially increase the company’s earnings as the eyewear business has a significantly wider margin compared to the health insurance products offered by WellPoint.
Moreover, there is substantial growth opportunity in the business, given 38 million people wear contact lenses and over 140 million people wear glasses in the U.S., thus creating a huge base of prospective clientele for the company.
WellPoint has emerged as the largest insurer on the basis of enrollment, nudging aside the likes of Aetna Inc. (AET), CIGNA Corporation (CI) and UnitedHealth Group Inc. (UNH). The Zacks Consensus Estimates for the second quarter and full-year 2012 are currently pegged at $2.09 and $7.76, respectively. This represents an increase of 14.1% and 10.9% year over year, respectively.
We maintain a long-term Neutral recommendation on WellPoint. The company retains a quantitative Zacks #3 Rank (short-term Hold rating).
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