The acquisition is the latest in a string of deals that UnitedHealth and Optum have been actively pursuing in recent years, targeting companies that offer geographic growth or strengthen the product line.
UnitedHealth Group, Inc.’s acquisition of The Advisory Board Company healthcare business for $1.3 billion is viewed as a credit positive by Moody’s Investors Service.
The deal, which is expected to close by early 2018, should increase growth and earnings at UnitedHealth’s Optum division, which will have access to ABCO’s research and IT services, Moody’s said.
“UNH has not indicated how it will finance the $1.3 billion purchase price of ABCO,” Moody’s said in a credit brief. “However, the transaction size is modest relative to our estimate of the parent company’s annual net cash flow of approximately $4 billion (net of shareholder dividends, capex and interest expense). We expect the transaction will not interfere with UNH’s stated goal of lowering financial leverage (debt to capital) to below 40% by the end of third-quarter 2017.”
ABCO provides research, technology, and consulting to healthcare organizations and educational institutions and had revenues of $803 million in 2016. Before selling the healthcare business to Optum, affiliates of Vista Equity Partners will acquire ABCO’s education business for $1.55 billion, Moody’s said.
“Joining Optum will enable us to better serve our members, thanks to Optum’s unmatched data analytics resources, investment capacities and operational experience in delivering large-scale solutions and services to all health care stakeholders,” Robert Musslewhite, CEO of The Advisory Board Company, who will continue to lead its healthcare advisory business, said in a media release announcing the deal.
Optum is a health services information business and it’s UNH fastest-growing division. It generated about 18% of the company’s revenue after intercompany eliminations and 34% of pre-tax earnings during the first half of 2017, Moody’s said.
UnitedHealth and Optum have been actively acquiring businesses in recent years, and Moody’s said the targets include companies that offer geographic growth or strengthen the product line. Those acquisitions include Surgical Care Associates, MedExpress and ProHealth, pharmacy benefits managers Catamaran in 2015, about $13 billion, largely debt-financed, and workers' comp claims specialiststs Helios in January 2016, the terms of which were not disclosed.
“Because of the Catamaran acquisition, UnitedHealth Group’s financial leverage remains slightly higher than our expectation for the rating,” Moody’s said. “However, credit support for UNH’s holding company obligations reflects significant non-regulated cash flows, primarily from Optum, in addition to statutory dividends from the group’s regulated insurance operations. The group’s adjusted financial leverage (where debt includes operating leases) was 42.2% at 30 June 2017. We expect that the company will reduce adjusted leverage to about 40% by year-end 2017.”
John Commins is the news editor for HealthLeaders.