The move represents a significant diversification for Cigna, which has largely focused its U.S. health plans on businesses. The company said it would issue new equity to cover about 20 percent of the purchase price, with the rest funded by additional debt and cash.
We view it as both a growth opportunity as well as a great marketplace to further differentiate, Cigna Chief Executive Officer David Cordani told reporters on a conference call.
Cigna plans to buy HealthSpring for $55 a share, a 37 percent premium over the closing price on Friday, the companies said in a statement on Monday.
HealthSpring shares jumped 33.7 percent to $53.68 in morning trading, while Cigna rose 0.7 percent to $45.03.
Shares of other health insurers that specialize in Medicare rose after the deal was announced. Humana Inc (HUM.N) rose 3.8 percent, Universal American Corp (UAM.N) gained 2.4 percent and WellCare Health Plans (WCG.N) jumped 6.7 percent.
There are still a few larger plans in the industry that want to become bigger Medicare players, and the number of plans out there (both public and private) with more than 50,000 lives is relatively small, Citigroup analyst Carl McDonald said in a research note.
Shares of Canadian pharmacy benefit manager SXC Health Solutions Corp (SXC.TO), which has HealthSpring as a major customer, tumbled 14 percent.
Investors have expected consolidation in the health insurance industry, but have also been concerned that the Obama administration and state insurance regulators could push back against deals that could threaten competition or drive premiums higher.
Asked whether the HealthSpring deal would face regulatory hurdles, Cordani said it was a segment expansion into an area where the company is not a large player and therefore should be manageable.
It's not a scale-based consolidation, Cordani said. We're obviously aware of the environment around scale-based consolidation.
The companies plan to close the transaction in the first half of 2012.
HealthSpring has about 340,000 Medicare Advantage members in 11 states and the District of Columbia, as well as more than 800,000 enrollees in stand-alone Medicare prescription drug plans.
The deal values HealthSpring at a relatively rich $3,200 per member, compared with the current industry average of about $869, Wells Fargo analyst Peter Costa said, showing that Medicare members appear to be worth more than typical commercial members.
HealthSpring's management, headed by CEO Herb Fritch, will now lead Cigna's Medicare expansion.
Cigna expects the deal to add to its earnings per share in the first full year of operations. Separately, the insurer raised its forecast for 2011 adjusted earnings to a range of $5.05 to $5.30 per share from a previous view of $4.95 to $5.25.
Cigna's financial adviser is Morgan Stanley (MS.N), and its legal adviser is Davis Polk. Goldman Sachs & Co (GS.N) was the financial adviser to HealthSpring, whose legal advisers were Skadden, Arps, Slate, Meagher & Flom LLP and Bass, Berry & Sims PLC.
(Reporting by Lewis Krauskopf in New York; Editing by Gerald E. McCormick and Lisa Von Ahn)