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WellCare's stock rises after announcing $2.5B deal for Meridian Health

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WellCare's stock rises after announcing $2.5B deal for Meridian Health

Shares of WellCare Health Plans Inc. climbed after the managed care company announced plans to acquire Meridian Health Plan of Michigan Inc., Meridian Health Plan of Illinois Inc. and pharmacy benefit manager MeridianRx.

For the holiday-shortened week ending May 31, the S&P 500 declined 0.82% to 2,705.27, while the SNL U.S. Insurance Index fell 1.60% to 987.49.

Positive overall sentiment about the deal overcame questions concerning Meridian's growth potential and a challenged managed care business environment in Illinois that some analysts referenced on a conference call to discuss the deal. WellCare specializes in Medicaid and Medicare managed care, and the tie-up would add to its Medicaid business in Illinois.

Matt Borsch, an analyst with BMO Capital Markets, was skeptical about WellCare's anticipated earnings boost from the deal given the expected integration costs, versus savings from combining the companies. The transaction nevertheless looks mostly positive as a strategic fit, Borsch wrote in a May 29 note.

Cantor Fitzgerald analyst Steven Halper, on the other hand, thought WellCare's estimate that Meridian would add 40 cents to 50 cents to its 2019 adjusted EPS was on the mark.

"We did some math, and I think the accretion estimate for 2019 was reasonable," Halper said in an interview.

Leerink analyst Ana Gupte said she has more conviction on WellCare following the deal announcement, and she raised her price target for the company to $300 from $275. The proposed acquisition, which is valued at $2.5 billion, is a good step toward WellCare's goal of doubling its revenues from 2016 to 2021, Gupte wrote in a May 30 note to clients.

"It points to calculated risk-taking by a strong management team, and we expect the company to work on rapidly [de-levering] the balance sheet in pursuit of further deals," Gupte said.

Some investors might have considered WellCare a takeout target given the deal environment in managed care, Cantor's Halper said. Since WellCare considers itself an acquirer, its small size compared to other public managed care providers means the company has other transaction opportunities available for growth, he said.

"There are lots of smaller health plans out there that companies like WellCare can go out and acquire and have a meaningful impact," Halper said.

For the week, WellCare's share price rose by 1.87% to $221.67.

Aflac Inc.'s shares ticked down the same day Bloomberg News reported that the SEC was reviewing allegations from former sales associates that the company massaged its financial reports to show more-favorable earnings results. Aflac President Teresa White said in a statement to the news outlet that the allegations had been investigated and found to be "without merit."

Aflac posted a 1.10% decline May 31 and a 0.55% drop for the week to $45.06.

The number of companies whose stocks declined outpaced the gainers for the week among the largest companies on the SNL U.S. Insurance Index. Athene Holding Ltd., Cigna Corp. and MetLife Inc. posted some of the largest percentage declines for the period. Athene fell 5.62% to $44.67, Cigna declined 3.67% to $169.39, and MetLife lost 4.19% to close at $45.99.