If WellPoint took $900 million and used it to repurchase stock, it would add $0.35 in accretion in 2013, after factoring in lost investment income/higher interest expense. Alternatively, if the company paid a $900 million special dividend, it would give shareholders $2.75 per share in cash, providing an instant 4% return to a stock that dramatically underperformed United in both 2010 and 2011, and has appreciated just 2.4% this year, relative to a 13.7% return at United.
Instead, WellPoint chose to spend $900 million to buy 1-800 Contacts. For comparison purposes, WellPoint paid $800 million to acquire CareMore, the Medicare plan in California. We’ve used the 1-800 Contacts website before, and had a good experience with it. It seems like a good business, but financially, this is a hard deal for us to understand, unless WellPoint has an extraordinary amount of visibility into how it can grow the revenue of the acquired business by around 75% in a relatively short period of time.
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By pushing their 900,000+ vision insurance customers to buy contact lenses and eyeglasses through 1800Contacts, the same way Luxottica does with EyeMed and Lenscrafters. Vision insurance usually doesn’t even cover 50% of the retail cost, so they save on the covered portion and pump revenue from the uncovered part.
I believe that health plans like WLP no longer think that they can make money on health insurance, post-Obamacare. However, it seems like a risky deal if SCOTUS and the voters in November get rid of Obamacare.
I can’t see value added other than through Obamacare. Actually, I see a conflict of interest, like in the old Merck-MEDCO.
As I read Michael T.’s comments, it dawns on me that the simple act of buying contact lenses will now be controlled by an insurers’ claims-processing bureaucracy.
It will also be interesting to see, as the try to get other insurers to use 1-800-Contacts, whether the FTC gets involved.