Following the news of
Coventry Healthcare Inc.
) imminent acquisition by
), several credit rating agencies - Standard & Poor's
(S&P), Moody's and Fitch Ratings - have placed the ratings of
Coventry on review with a positive outlook, according to
The rating agencies believe that the acquisition by Aetna will
be beneficial for the company and, therefore, have indicated the
possibility of an upward revision in ratings.
Aetna is a substantially larger company compared to Coventry,
with a stronger market position and a higher credit rating.
Coventry currently has a counterparty credit rating of "BBB-" (one
notch above junk status) from S&P, issuer default rating of
"BBB" (two notches above junk status) from Fitch and senior
debt rating of "Baa3" (one notch above junk status) from
However, S&P has revealed that it expects to raise the
rating on Coventry to "BBB+" within a year. This is only one notch
below Aetna's rating. However, the rating is open to revision based
on Coventry's financial results until the closure of the
acquisition. Furthermore, the debt rating on Coventry's debt is
expected to be raised to the level with Aetna's debt rating after
the acquisition as the latter will take over the entire debt of the
The optimistic outlook by the rating agencies reflects their
view that the acquisition will be beneficial for Coventry and
consequently, its credit quality. Following the acquisition, the
company is expected to be considered as a strategically important
subsidiary of Aetna.
Aetna signed an agreement to acquire Coventry for $7.3 billion,
earlier this week. The purchase consideration also includes the
takeover of the latter's debt.
Per the agreement, shareholders of Coventry will get $27.30 in
cash and 0.3885 Aetna common shares for each Coventry share, or
$42.08 per share, based on the closing price of Aetna common shares
on Friday, August 17. Aetna is expected to issue $2.5 billion of
debt and use the existing cash in hand to finance the deal, which
is likely to close by mid 2013.
However, when the news of the proposed takeover broke, Coventry
came under fire with a number of investigations leveled against it.
Law firms Rigrodsky & Long, P.A., Newman Ferrara LLP, Ryan
& Maniskas, The Briscoe Law Firm PLLC, Powers Taylor LLP, Levi
& Korsinsky LLP, Robbins Umeda LLP, Faruqi & Faruqi LLP,
Glancy Binkow & Goldberg LLP and many others announced
investigations against the company's Board to determine whether it
performed its fiduciary duty by ensuring the best possible pricing
for the company, as they consider the premium to be low.
The law firms are concerned that the Board might have failed to
maximize shareholders' value by under-pricing the deal. The
allegations arise as the Board did not auction Coventry in the open
market. Moreover, it agreed to pay a huge termination fee in case
the company cancels the agreement to accept a better offer from a
competing company. The firms are also worried that Coventry might
have failed to disclose all material information to
Coventry carries a Zacks #3 Rank, implying a short-term Hold
rating. We maintain a long-term 'Neutral' recommendation on the
AETNA INC-NEW (AET): Free Stock Analysis Report
COVENTRY HLTHCR (CVH): Free Stock Analysis
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