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.