Quarterly report pursuant to Section 13 or 15(d)

Acquisitions

v3.20.1
Acquisitions
3 Months Ended
Mar. 31, 2020
Business Combinations [Abstract]  
Acquisitions Acquisitions

WellCare Acquisition

On January 23, 2020, the Company acquired all of the issued and outstanding shares of WellCare. The transaction was valued at $19,555 million, including the assumption of debt. The WellCare Acquisition brings a high-quality Medicare platform and further extends our robust Medicaid offerings. The WellCare Acquisition also enables us to provide access to more comprehensive and differentiated solutions across more markets with a continued focus on affordable, high-quality, culturally-sensitive healthcare services. With the WellCare Acquisition, we further broadened our product offerings by adding a Medicare prescription drug plan to our existing business lines. 

Total consideration paid for the acquisition was $17,605 million, consisting of Centene common shares valued at $11,431 million (based on Centene's stock price of $66.76), $6,079 million in cash, and $95 million related to the fair value of replacement equity awards associated with pre-combination service. Each WellCare share was converted into 3.38 of validly issued, fully paid, non-assessable shares of Centene common stock and $120.00 in cash. In total, 171 million shares of Centene common stock were issued to the WellCare stockholders. The cash portion of the acquisition was funded through the issuance of long-term debt as further discussed in Note 7. Debt. The Company also recognized $313 million of acquisition related costs, primarily related to WellCare, that were in the consolidated statement of operations for the three months ended March 31, 2020.

The acquisition of WellCare was accounted for as a business combination using the acquisition method of accounting that requires assets acquired and liabilities assumed to be recognized at fair value as of the acquisition date. Due to the timing of the acquisition, the valuation of the assets acquired and liabilities assumed has not yet been finalized, and as a result, the preliminary estimates have been recorded and are subject to change. Any necessary adjustments from our preliminary estimates will be finalized within one year from the date of acquisition. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.

The Company's preliminary allocation of the fair value of assets acquired and liabilities assumed as of the acquisition date of January 23, 2020 is as follows ($ in millions):
Assets acquired and liabilities assumed
 
 
Cash and cash equivalents
 
$
2,899

Premium and related receivables
 
3,414

Short-term investments
 
403

Other current assets
 
1,158

Long-term investments
 
2,699

Restricted deposits
 
319

Property, software and equipment
 
270

Intangible assets (a)
 
7,000

Other long-term assets
 
261

Total assets acquired
 
18,423

 
 
 
Medical claims liability
 
3,962

Accounts payable and accrued expenses
 
3,142

Return of premium payable
 
238

Unearned revenue
 
223

Long-term debt (b)
 
2,055

Deferred tax liabilities (c)
 
1,537

Other long-term liabilities
 
281

Total liabilities assumed
 
11,438

 
 
 
Total identifiable net assets
 
6,985

Goodwill (d)
 
10,620

Total assets acquired and liabilities assumed
 
$
17,605



The Company has made the following preliminary fair value adjustments based on information reviewed through March 31, 2020. Significant fair value adjustments are noted as follows:

(a)
The identifiable intangible assets acquired are to be measured at fair value as of the completion of the acquisition. The fair value of intangible assets will be determined primarily using variations of the income approach, which is based on the present value of the future after tax cash flows attributable to each identified intangible asset. Other valuation methods, including the market approach and cost approach, will be considered in estimating the fair value. The identifiable intangible assets include purchased contract rights, trade names, provider contracts and developed technologies. The Company has estimated the preliminary fair value of intangible assets to be $7,000 million with a weighted average life of 13 years.

The preliminary fair values and weighted average useful lives for identifiable intangible assets acquired are as follows:
 
 
Fair Value
 
Weighted Average Useful Life (in years)
Purchased contract rights
 
$
5,200

 
 
Trade names
 
800

 
 
Provider contracts
 
700

 
 
Developed technologies
 
300

 
 
Total intangible assets acquired
 
$
7,000

 
13

(b)
Debt is required to be measured at fair value under the acquisition method of accounting. The fair value of WellCare's aggregate principle of $1,950 million Senior Notes assumed in the acquisition was $2,055 million. The $105 million increase will be amortized as a reduction to interest expense over the remaining life of the debt.

(c)
The preliminary deferred tax liabilities are presented net of $408 million of deferred tax assets.

(d)
The acquisition resulted in $10.6 billion of goodwill related primarily to synergies expected from the acquisition and the assembled workforce of WellCare. The assignment of goodwill to the Company's respective segments has not been completed at this time, but the majority of goodwill is expected to be allocated to the Managed Care segment. The majority of the goodwill is not deductible for income tax purposes.

Divestitures

Immediately prior to the closing of the WellCare Acquisition, Anthem, Inc. acquired WellCare's Missouri Medicaid health plan, a WellCare Missouri Medicare Advantage health plan, and WellCare's Nebraska Medicaid health plan. CVS Health Corporation acquired portions of Centene's Illinois Medicaid and Medicare Advantage health plans as part of previously announced divestiture agreements. The Company recorded a $93 million pre-tax gain as a result of the Illinois divestiture, which is included in investment and other income on the Consolidated Statements of Operations.

Unaudited Pro Forma Financial Information

The following table presents supplemental pro forma information for the three months ended March 31, 2019 ($ in millions, except per share data):
 
 
Three Months Ended
March 31, 2019
Total revenues
 
$
25,169

Net earnings attributable to common stockholders
 
$
552

Diluted earnings per share
 
$
0.93



The unaudited pro forma total revenues for the three months ended March 31, 2020 were $27,815 million. It is impracticable for the Company to determine the pro forma earnings information for the three months ended March 31, 2020 due to the nature of obtaining that information as the Company immediately began integrating WellCare into its ongoing operations.

The unaudited pro forma financial information reflects the historical results of Centene and WellCare adjusted as if the acquisition had occurred on January 1, 2019, primarily for the following:
Interest expense associated with debt incurred to finance the transaction.
Elimination of historical WellCare intangible asset amortization expense and addition of amortization expense based on the preliminary estimated values of identifiable intangible assets of approximately $7.0 billion.
Issuance of 171 million shares of Centene common stock in connection with the per share common stock consideration.
Elimination of acquisition related costs.
Adjustments to income tax expense related to pro forma adjustments and increased income tax expense related to IRS Regulation 162(m)(6).

The pro forma results do not reflect any anticipated synergies, efficiencies, or other cost savings of the acquisition. Accordingly, the unaudited pro forma financial information is not indicative of the results if the acquisition had been completed on January 1, 2019 and is not a projection of future results. The unaudited pro forma financial information does not reflect the previously discussed divestitures as the impact would be impracticable to quantify.