Coventry will buy First Health for $1.8 billion

First Health Group, which manages health-care benefits for employers and unions and which has struggled lately, will be acquired by Coventry Health Care in a $1.8 billion cash and stock deal, the companies said Thursday.



Maryland-based Coventry, a managed health-care company with operations in 15 U.S. markets and 3.1 million members, is purchasing firms to compete with larger insurers such as UnitedHealth Group because employers aren't adding jobs fast enough to increase membership in Coventry's health plans. Adding Downers Grove-based First Health will extend Coventry's coverage to all 50 U.S. states.



Like its bigger rivals, Coventry has grown through acquisitions since beginning operations in 1987. The company listed 11 acquisitions from 2000 and 2003 in a March filing with the U.S. Securities and Exchange Commission.



Coventry will issue 0.1791 shares of Coventry common stock and pay $9.375 in cash for each First Health share under the terms of the agreement.



The agreement values First Health at about $17.67 a share, based on Thursday's closing price for Coventry. That's a 17 percent premium to First Health's closing price Wednesday.



Shares of First Health rose $2 Thursday, or 13 percent, to $17.04 They had dropped 23 percent this year, before Thursday's gain. The transaction is based on about 94.5 million First Health shares outstanding, spokeswoman Erin Gardiner said.



Shares of Coventry fell $5.76, or 11 percent, to $46.29 Thursday.



"This merger will provide great opportunities for all of our constituents including colleagues, clients and providers, and enhance efforts to secure and service a growing client base," said First Health President and Chief Executive Edward L. Wristen.



First Health was founded in 1982 as a business that evaluated the efficiency, quality and necessity of health-care services. Through strategic mergers and acquisitions it evolved into a full-service group health- and workers-compensation benefits company.



But it has faced recent challenges. The company, which employs 6,000 people, including 750 in the Chicago area, cut 200 jobs in the first quarter as profit came in below expectations. Thursday it reduced its 2004 earnings per share forecast to $1.25 to $1.28 per share, down from $1.30 to $1.40 projected in April. It blamed slower ramp up of new business in the third quarter.



Through the first six months of this year, revenues fell to $58.9 million from $74 million a year earlier.



"The combination of Coventry Health Care and First Health Group creates a truly national health-benefits platform with the tools to serve our local, national and governmental clients," said Coventry President and Chief Executive Allen Wise.



Bear Stearns & Co. is ''uncertain as to the strategic rationale for the acquisition given our concern with regard to the long-term viability of First Health's group health business,'' said Bear Stearns analyst John Rex in a report. He has an ''overweight'' rating on the shares and doesn't own them.



Coventry said the purchase will add 30 cents to 36 cents a share to earnings next year, previously forecast at $4.13 to $4.17. The company expects to save $20 million to $30 million next year and $40 million to $50 million by the end of 2006.



It also reported that third-quarter net income rose 29 percent to $87 million, or 96 cents a share, from $67.5 million, or 74 cents, in the year-earlier period.



''They know what they are doing,'' said Thomas Mangan, a vice president with James Investment Research, which he said holds about 140,000 Coventry shares. The First Health purchase ''is more of the same and the same has been pretty good.''



Coventry didn't disclose whether the acquisition deal will lead to job cuts. The purchase, which is subject to regulatory approval, is expected to close in the first quarter of 2005.