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Why DaVita Inc. Jumped Higher Today

By Brian Orelli, PhD - Dec 6, 2017 at 11:52AM

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Investors are excited about the healthcare company shedding a struggling unit at a good price.

What happened

DaVita (DVA 0.07%) is up 12.8% at 12:35 p.m. EST after announcing that it's selling its medical group to UnitedHealth Group's (UNH 0.04%) health services business Optum for $4.9 billion. UnitedHealth's investors ho-hummed the deal with shares trading basically flat today.

So what

The sale of DaVita's medical group, which has 300 medical clinics, 35 urgent-care centers, and six outpatient surgery centers, shouldn't be much of a surprise since management said the company was exploring selling the unit that produced an operating loss of $5 million in the most recent quarter.

Health insurer UnitedHealth shouldn't be much of a surprise as the buyer either since it's been expanding its healthcare offerings with more direct patient care. Earlier this year, United Health acquired Surgical Care Affiliates for $2.3 billion.

The only big surprise is the price, which seems a little high given that DaVita's medial group is losing money. But United Health must think it can lower costs through synergies with Optum's other offerings, which will not only help produce a profit for the acquired unit, but can also help United Health's insurance business offer plans at a lower rate.

Two men shaking hands in a conference room

Image source: Getty Images.

Now what

DaVita plans to use the proceeds to buy back stock and pay down debt, which seems like a good use for the newly found money. Not having the medial group will allow management to focus on its dialysis business and the issues that unit is facing.

For UnitedHealth, the move looks like a good one, albeit at a high price. Fortunately, combining DaVita's medical group with Optum should produce synergies that can help pay for the purchase over the long run.

Brian Orelli has no position in any of the stocks mentioned. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

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Stocks Mentioned

DaVita Inc. Stock Quote
DaVita Inc.
$89.64 (0.07%) $0.06
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$545.22 (0.04%) $0.22

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