Take Long View

What: Health Net's (NYSE:HNT) shares are jumping more than 10% today after the company announced that competitor Centene Corp (NYSE:CNC) will acquire it in a deal valued at $6.8 billion, including debt.

So what: Although the Supreme Court ruled in 2012 that Obamacare couldn't require states to expand their Medicaid programs to include people with income up to 100% of the Federal poverty level, voluntary Medicaid expansion has still proven to be a massive boon to the industry.

Health Net and Centene, two of the nation's largest Medicaid insurers, are among those that have benefited most from Medicaid expansion in the 30 states, including the District of Columbia, that have adopted it.

Health Net's trailing 12-month revenue has climbed from a little over $11 billion in 2013 to nearly $15 billion, and Centene's sales have surged from less than $8.75 billion to more than $18 billion through the first quarter.

CNC Revenue (TTM) Chart

Because Medicaid enrollment is expected to climb from 71 million people this year to more than 80 million people by 2022, and more states could choose to expand Medicaid coverage, it's little wonder that Centene is willing to exchange 0.622 of its shares for each share of Health Net.

Now what: Combining these two insurers should offer up plenty of scale that can be leveraged against fixed costs for margin and profit growth, while also expanding Centene's reach in key western markets including California, Arizona, and Washington.

In total, the newly combined company will serve more than 6 million Medicaid members, making it one of the largest Medicaid insurers in the country.

Importantly, by eliminating overlapping costs, Centene estimates that the deal will be accretive to adjusted earnings by 20% in year one and that the positive impact on earnings will be even greater in year two.

Because of the potential for sales and profit growth and the fact that this is an all-stock deal, rather than a cash deal, investors may want to consider sticking with these stocks.

 

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.