HS Healthspring Healthspring Inc. Common Stock

In order to fund the purchase of HealthSpring Corp. (HS), CIGNA Corp. (CI) is in the process of raising equity capital. On Wednesday, the company announced the issue of 15.2 million shares of its common stock at $42.75 each.

The proceeds from the offering will however, fund only a portion of the total deal value of $3.8 billion. The remaining requirement will be met from a mix of both long and short tem debt. To this effect, the company has obtained a bridge loan of $2.5 billion from Morgan Stanley (MS).

The acquisition was announced by Cigna last month. HealthSpring’s vast Medicare business with its trusted brand name makes its a good fit for Cigna, which intends to foray into the rapidly growing Medicare Advantage business. With this acquisition, Cigna will be able to access 800,000 Medicare prescription customers and 340,000 Medicare advantage customers.

Cigna, the fourth largest health insurer in U.S., had been historically biased towards commercial business (primarily self funded) and had been averse towards government business (Medicare and Medicaid). But it is now targeting the government business. The shift in strategy stems from the fact that the expected demand for Medicare Advantage products will be huge in the upcoming years.   

A look at the Balance Sheet shows that Cigna ended third quarter 2011 with $3.2 billion in debt, representing a moderate debt ratio of approximately 29%. The ratio will, however, go northwards after the HealthSpring acquisition. But the insurer is generating strong cash flow quarter after quarter, reflecting impressive returns on capital in each of its business segments. 

Despite funding 80% of the deal with debt, we

 
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