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Report Of WellChoice-Oxford Talks

If it materializes, the acquisition of Oxford Health Plans by WellChoice, Inc. would realize “substantial” synergies and move the industry further along toward oligopoly, according to a leading industry analyst.

On April 5, The Wall Street Journal reported that WellChoice, New York, and Oxford, Trumbull, Conn., are in talks about an acquisition. WellChoice has the exclusive right to use the Blue Cross Blue Shield marks in 10 New York counties.

At press time, spokespeople for both WellChoice and Oxford Health Plans declined comment.

At midday on April 5, both WellChoices and Oxfords stock prices had risen.

Both companies have sizeable market shares in the New York metropolitan area. In New York City, WellChoices market share is 22%, while Oxfords is 8%, according to Smith Barney. In the Northeast, WellChoices share is 12% and Oxfords is 9%.

Analysts generally had a positive response to the Journals article about talks between the 2 companies. In an April 5 analysis, Smith Barney analyst Charles Boorady noted that the move up in both stocks following the report of talks “bodes well for a potential merger to be announced and also for M&A generally in the managed care space.”

Brad Ellis, an analyst in the Chicago office of Fitch Ratings, said that if reports prove true, there would probably be no antitrust issues. “There are still enough players of size” in the region, he continued.

Ellis says it is not unusual for Blues operations to have 20%, 30% or even 40% of market share in a particular area.

Doug Meyer, an analyst with Fitch in Chicago, said that if the deal happens, then it would be a good fit because in the health care market, membership concentration is important to success. Oxford has been mentioned as a takeover candidate quite often, he added.

Going forward, stronger results in the industry could encourage M&A activity, he continued, but any such activity would not be between Blues because of legal and regulatory requirements, but more likely among non-Blues.

The deal would create a stronger position for the combined company in the New York marketplace, said Stephen Zaharuk, an analyst with Moodys Investors Service, New York.

However, Zaharuk said, Oxford is very popular with smaller brokers and he wonders, if the reports prove true, whether that relationship would be hurt by its becoming part of a larger entity.

Oxfords other strength is in its brand name, he continued, adding that it would be a concern if Oxford lost “its uniqueness and culture.”

UBS analyst William McKeever wrote that a combination would make sense due to economies of scale and synergies.

The transaction would make sense, McKeever wrote, because Oxford has “a strong presence in the small group market which would complement WC exposure to the large group.”

Additionally, he wrote, WellChoice has the wherewithal to make an acquisition. The company, he wrote, generates $300 million annually in free cash flow and has $2 billion in cash on the balance sheet.

If the companies do join, he wrote that the new company “can take out 3-4% of the administrative costs of the combined company.” The savings would be on combined sales, general and administrative expenses of $1.5 billion. The transaction “could be accretive by 5-6% for WellChoice in the first full year of the transaction, assuming the 25% premium discussed in the WSJ article.”

In its 2003 10K filing, WellChoice said its strategy is to be “the leading health insurer in the New York marketplace and surrounding areas.”

Oxford has 1.55 million members, 1.11 million of which reside in New York. WellChoice has 4.8 million members.

Reproduced from National Underwriter Edition, April 9, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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