DealBook: Cigna to Buy HealthSpring for $3.8 Billion

Shares of HealthSpring leaped 33.7 percent following the announcement of the deal with Cigna.

7:40 p.m. | Updated

Cigna has become the latest company to bet on the aging of America, agreeing on Monday to buy HealthSpring for $3.8 billion in cash to expand its Medicare and senior care business.

With HealthSpring, Cigna will add 340,000 Medicare Advantage customers in 11 states and Washington, as well as a stand-alone Medicare prescription division with more than 800,000 customers.

“It’s a fast-growing space, and the demographics are there,” David M. Cordani, Cigna’s chief executive, said in a telephone interview on Monday.

Advantage plans currently serve about a quarter of some 46 million Medicare beneficiaries. UnitedHealthcare and Humana are among the biggest companies in this business.

Cigna’s acquisition could prompt takeover interest for other smaller Medicare providers, including Universal American and WellCare, wrote Carl McDonald, an analyst with Citigroup, in a research note on Monday.

Shares of those providers rose sharply on Monday. WellCare closed up nearly 9 percent, while Universal American closed up nearly 4 percent.

The deal is the largest that Cigna has ever struck, according to Capital IQ data, and it is paying a premium. Under the terms of the deal, it will pay $55 a share, 37 percent above HealthSpring’s closing price on Friday. Mr. McDonald estimated that Cigna was paying about $10,000 per member of HealthSpring’s Medicare Advantage customers, which is roughly double the valuations of other Medicare-based deals in recent years.

Mr. Cardoni said Cigna had long identified HealthSpring’s specialty — providing a private insurance plan that combines traditional Medicare coverage with additional services — as an important area for growth. Cigna negotiated with HealthSpring for several months before striking Monday’s deal.

HealthSpring has reported steady profit growth since going public in 2006, as it has added customers in a rapidly growing business. Last year, it reported $194.2 million in net income on $3.1 billion in revenue.

HealthSpring’s existing management team, led by its chairman and chief executive, Herbert A. Fritch, will continue to lead the business after the deal closes. Mr. Fritch owns a 3.3 percent stake in the company, according to Thomson Reuters data.

“We’ll be integrating aspects of our company into their model,” Mr. Cardoni said. He added that Mr. Fritch and his team would benefit from access to Cigna’s existing portfolio of specialty services.

Based in Nashville, HealthSpring was built up by G.T.C.R. Golder Rauner, a private equity firm based in Chicago, which in 2004 took control of a predecessor, NewQuest Health Solutions, through a recapitalization. G.T.C.R. took HealthSpring public in February 2006 in a public offering priced at $19.50 a share.

Joseph P. Nolan, the head of G.T.C.R.’s health care services team, still holds a seat on HealthSpring’s board.

Cigna said it expected the deal, which is estimated to close in the first half of next year, would begin adding to its earnings per share in the first full year after closing. Separately on Monday, Cigna raised its earnings guidance for this year by 24 cents, as it took higher-than-expected revenue in the third quarter.

Shareholders in both companies appeared to like the deal. HealthSpring’s shares jumped 33.6 percent to $53.66. Meanwhile, shares in Cigna rose 0.7 percent to $45.03, in the latest example of investors rewarding companies that are unafraid to buy additional growth if the price is reasonable.

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