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December 02, 2004
Fitch Ratings Comments on Anthem/WellPoint Merger
Press Release -- Anthem, Inc. (Anthem) and WellPoint Health Networks Inc. (WellPoint) today announced the completion of their merger, creating WellPoint Inc., the largest health insurance and managed care company in the U.S. Fitch expects total revenues for the company, on a combined basis, to exceed $42 billion in 2004.
The merger, which was originally announced on Oct. 27, 2003, had been delayed for several months by regulatory resistance, primarily from the California Department of Insurance, but also by the insurance commissioner in Georgia. The transaction was finally granted approval by the California insurance commissioner on Nov. 9, 2004 and was approved by the insurance commissioner in Georgia this morning. Negotiations included additional financial commitments for each state, but Fitch does not consider the commitments to be significant relative to this transaction.
After placing the ratings of both companies on Rating Watch Negative immediately following the original announcement of the deal, Fitch affirmed the ratings of Anthem and WellPoint on June 17, 2004. The affirmation reflected the outcome of Fitch's analysis of the transaction, including the balance sheet effect in terms of leverage and capital quality, integration plans, and a continued strong outlook for the operating performance of these two companies, as well as perceived benefits of the combination. Since the affirmation, both companies have continued to show very strong operating performance and have further strengthened their balance sheets.
Among Fitch's concerns related to the transaction are the obvious integration risks, particularly in light of the size and complexity of both organizations. Also, while the accounting treatment of the transaction will not result in a significant change in the combined company's reported balance sheet leverage, Fitch believes that the substantial amount of goodwill and intangible assets that will be added to the balance sheet does weaken the quality of its book equity position. Anthem is borrowing approximately $2.8 billion directly related to the transaction, which has been combined with cash on hand to fund the cash portion of the $16.5 billion purchase price and transaction costs.
Fitch anticipates continued strong operating performance from the company for the foreseeable future and expects management to focus on debt reduction over the near term to restore the company's leverage measures to a more conservative level.
Fitch expects the company to report a debt-to-total capital ratio below 25% on approximately $5.3 billion of debt outstanding. Over the next 18 months, Fitch expects the company to reduce leverage substantially and is anticipating a ratio of debt-to-EBITDA of 1.0 times (x) or below by year-end 2005.
Fitch believes that the combination of Anthem and WellPoint will provide important benefits in the form of product design, a much broader multistate provider network, and geographic diversification of earnings, revenues, and total enrollment. Both companies have very strong management teams, experience excellent operating performance, and have a leading market share in nearly every market in which they use the Blue Cross and Blue Shield brand.
Indianapolis-based Anthem reported consolidated net income of $775.6 million on revenue of approximately $14 billion in the first nine months of 2004. Thousand Oaks, California-based WellPoint reported net income of $910.2 million on revenue of $17.3 billion for the same period. On a combined basis, these two companies are expected to report total medical enrollment in excess of 28 million people at year-end 2004. The combined company now provides health benefits under the Blue Cross and Blue Shield names and marks in 13 states.
Posted by Tom Troceen