Insurers and Mergers & Acquisitions and Insurance and WellPoint and Health Care & Life Sciences and Health Care & Insurance

WellPoint seeks to diversify by buying contacts retailer

June 4, 2012

WellPoint Inc. plans to buy contact lens retailer 1-800-Contacts Inc. in a deal that would give the insurer its first direct-to-consumer business outside selling individual health coverage.

WellPoint will pay private-equity firm Fenway Partners about $900 million for 1-800 Contacts, said a person familiar with the agreement who asked not to be identified because the information hasn’t been disclosed. The insurer trimmed its 2012 profit forecast by 4 cents as a result of the deal, to $7.80 a share, Indianapolis-based WellPoint said in a statement Monday.

WellPoint said Monday that the eyewear company will help diversify its revenue sources with a high-margin business. The insurer typically generates an after-tax profit margin of around 4 percent. 1-800 Contacts can generate margins in the double-digit range, said Ken Goulet, WellPoint's president of commercial and specialty companies.

In addition, he said the business has shown robust growth, although he declined to offer specifics.

Investors didn't immediately embrace the deal. WellPoint's stock dropped 87 cents, or 1.3 percent, to $65.49 a share, in late-morning trading.

1-800 Contacts fills orders for several brands of contact lens by phone, internet, mail or fax. It also sells eye glasses through its glasses.com website and operates a partnership with Wal-Mart Stores Inc., the world's largest retailer.

"The demand for both contacts and glasses has been a growing business and will accelerate as baby boomers continue to age," Goulet said.

1-800 Contacts currently has about 3.3 million customers. WellPoint Chairwoman and CEO Angela Braly said in a statement that the business comes with a significant growth opportunity because there are more than 38 million people wearing eye contact lenses and more than 140 million people wearing eye glasses in the United States.

WellPoint is the second-largest U.S. health insurer based on both revenue and enrollment, trailing only UnitedHealth Group Inc. It runs Blue Cross Blue Shield plans in 14 states, including California and New York, and health insurance is WellPoint's main product.

The company said in April its total medical membership fell nearly 2 percent to 33.7 million people compared to the end of last year. The company lost enrollment in its two largest membership segments, plans that provide health insurance to employees of small businesses and large, national accounts.

WellPoint, like other health insurers, could see significant enrollment gains after the health care overhaul expands in a couple years to cover millions of uninsured people. But it also will face fees and costs tied to the 2010 law, which is currently being reviewed by the U.S. Supreme Court.

Goulet said WellPoint wants to diversify its revenue sources "to make the company healthier and more balanced," and part of that involves adding businesses that fit into its portfolio but are separate from its core insurance products.

Plus, he said 1-800 Contacts receives high customer satisfaction and refill rates, and that can help WellPoint's push to become more consumer friendly.

Many health care companies are increasing their focus on consumers because their customers or patients are being exposed more to the rising costs of care and coverage, and they're becoming more knowledgeable about other options available to them.

WellPoint expects the deal to close in the third quarter and will finance it with cash on hand. The insurer expects its 2012 earnings to take a hit of 4 cents per share due to transaction and integration costs.

WellPoint shares are up 16 percent from their 52-week low of $56.61 in August. They peaked for the past year at $80.90 last July.

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