Sunday, April 08, 2007

Hit #156 (Sierra Health)

Sierra Health (SIE) is being bought by UnitedHealth for $2.6 billion in a cash deal. This offer, of $43.5/share, makes for a gain of 31.98% over my average cost of $32.96.

My Sierra Health purchase was completely funded by proceeds from another takeover - that of Encore Medical (Hit #104), and so represents a nice compounding effect. Part of the gains from Encore went into National Medical Health Card Systems(NMHC).

The price being paid is lower than what I expected. There are some attempts by AMA to block the deal, but it is likely to get regulatory approval. I was hoping to see another bidder, say Aetna, pony up more, but the prospects have faded away.

I had made a post on Sierra when it came out with disappointing earnings news. I mentioned Aetna as the prospective buyer, with a price target of $44-50.

Aetna was also subject to a similar pullback, and I had recommended the stock then. Shares have since recovered strongly, and I would avoid buying more at this point.

One other player that I mentioned in the past was Molina Healthcare (MOH). I am still holding onto my shares bought then, enjoying the wild-ride! Molina today doesn't look undervalued anymore, though the company is cash-rich compared to its peers. Molina is still likely to see a 30% premium in a takeover. And, Michelle at footnoted has found an interesting reference to change in control in Molina's latest SEC filing. A buyout must be on the cards.

A few other playes in the sector, like Centene (CNC), Amerigroup (AGP) and National Medical Health Card Systems (NMHC) look attractive - I listed a few of them here. HealthSpring (HS), which went public last year, is not cheap anymore. I would wait before adding to my position there.

Previous hit - MapInfo(#155)


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