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(Reuters)—Insurer Aetna Inc. said it will buy rival Coventry Health Care Inc. for $5.6 billion in cash and stock to boost its share of government business and benefit from U.S. health care reforms.
The U.S. health care reform aims to provide coverage for 16 million more Americans through privately run health insurance exchanges in each state, and will expand Medicaid eligibility for an additional 16 million people by raising limits on household income.
The acquisition of Coventry will help Aetna lift its share of revenue from its government business to over 30% from 23%.
It will help Aetna add nearly 4 million medical members and 1.5 million Medicare Part D members. Medicare Part D is a federal program that reduces prescription drug costs for Medicare beneficiaries.
"Integrating Coventry into Aetna will complement our strategy to expand our core insurance business, increase our presence in the fast-growing government sector and expand our relationships with providers in local geographies," Aetna CEO Mark Bertolini said in a statement.
Aetna will pay $27.30 in cash and 0.3885 shares for each Coventry share held, a total value of $42.08 per share, Coventry and Aetna said in a joint statement.
The deal is at a 20.4% premium to Coventry's Friday closing stock price of $34.94.
Shares of Coventry rose above the offer price, gaining 21% to $42.15 in premarket trade on Monday.
Including the assumption of Coventry debt, the sale is valued at $7.3 billion, the companies said.
Aetna said it expects to finance the cash portion of the transaction with a combination of cash on hand and by issuing about $2.5 billion of new debt and commercial paper.
The deal is expected to add modestly to Aetna's operating earnings per share in 2013, 45 cents in 2014 and 90 cents in 2015.
Aetna's shares closed at $38.04 on Friday on the New York Stock Exchange.
In July, health insurer WellPoint Inc. said it would buy rival Amerigroup Corp. for $4.46 billion, nearly doubling its Medicaid business.
Last October, Cigna Corp. agreed to buy HealthSpring Inc. for $3.8 billion to strengthen its Medicare business.