(Bloomberg) -- Centene Corp. agreed to buy Health Net Inc. for about $6.3 billion in cash and stock, creating a combination of two smaller U.S. health insurers ahead of an expected round of mergers among the industry’s giants.

Health Net investors will get 0.622 shares of Centene and $28.25 in cash for each share they hold, the companies said in a statement on Thursday. The implied price of $78.57 a share is 21 percent more than Health Net’s closing stock price Wednesday.

The deal gives Centene the biggest market share among private administrators of Medicaid, the federally funded health program for the poor -- a bet that the U.S. government will keep playing a larger role in health care.

The transaction would give Centene a bigger presence in the California Medicaid program, which is the largest in the U.S. with more than 12 million individuals, and provides an entry into the Medicare market.

The transaction makes sense, said Peter Costa, an analyst at Wells Fargo & Co. “Centene is the largest Medicaid managed- care company, but has only minor market share in California, where Health Net has been rapidly growing,” he said.

Health insurers in the U.S. are looking at mergers to cut costs and keep profits expanding after enjoying an influx of new business from the Patient Protection and Affordable Care Act, which brought previously uninsured people into the market for the first time. At the same time, the law put pressure on profit margins by imposing new fees and mandating companies spend at least 80 percent to 85 percent of premiums on medical claims.

Merger madness

Aetna is said to be nearing an acquisition of Humana, Bloomberg reported last week. And on June 20, Anthem went public with a bid for Cigna. UnitedHealth Group, the largest U.S. health insurer, could also make a bid for Aetna.

It’s also possible UnitedHealth could jump in with a competing offer for Health Net, said Ana Gupte, an analyst at Leerink Partners LLC.

Centene will assume about $500 million in debt as part of its transaction with Health Net, which the companies expect to close in early 2016. The buyer plans to fund the purchase using its existing cash and debt financing, with Wells Fargo & Co. providing $2.7 billion in financing commitments, the companies said.

The combined company would have more than 10 million members and an estimated $37 billion in pro forma premium and service revenues for 2015, and the acquisition would boost earnings by about 10 percent in the first year, according to the statement.

Stock moves

Health Net rose 11 percent to $72.13 at 11:38 a.m. in New York. Centene dropped 6.1 percent to $75.95.

Centene Chief Executive Officer Michael Neidorff said he’s not concerned about the market’s reaction.

“This is a very quiet market day, we all know that,” he said in a telephone interview. “As people understand the benefits of this transaction, it will take care of itself.”

Neidorff, who’s also Centene’s chairman, will be chairman, president and CEO of the combined company, which will be based in St. Louis.

Health Net CEO Jay Gellert will help with the transition, the companies said. If Gellert departs after the deal closes, he could be eligible for a golden parachute worth $38 million at the implied offer price, according to a Bloomberg analysis of the company’s most recent proxy filing.

Allen & Co. and Evercore Partners Inc. were the financial advisers to Centene on the transaction, with Skadden, Arps, Slate, Meagher & Flom LLP offering legal counsel. JPMorgan Chase & Co. is Health Net’s financial adviser with Morgan, Lewis & Bockius LLP serving as legal counsel.

--With assistance from Chitra Somayaji in London and Ryan Sachetta, Anders Melin and Caleb Melby in New York.

Instant Insights /

Centene to buy Health Net in $6.3 billion health care deal

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