Daily Deal/The Deal – XLHealth offers bright spot for sponsor MatlinPatterson
By David Holley, November 22, 2011

Private equity investors in Baltimore-based XLHealth Corp. may have made a3 to 5 times return on investments from the sale of the Medicare health plan provider to UnitedHealth Group Inc., announced Tuesday, Nov. 22.

Though no financial terms were announced for Minnetonka, Minn.-based UnitedHealth’s acquisition of XLHealth, the transaction price could be at least $1.1 billion, based on some rough estimates.

MatlinPatterson Global Advisers LLC led a private placement worth about $290 million in August 2007. Prior to that, GS Capital Partners LP, the investment arm of Goldman, Sachs & Co., contributed $63.75 million in 2004, partnering with Norman Payson, the former chairman and CEO of Oxford Health Plans Inc. GS Capital remained an investor after MatlinPatterson’s equity financing in 2007.

UnitedHealth most likely paid a price similar to what Cigna Corp. paid in its Oct. 24 acquisition of HealthSpring Inc., according to Morningstar Inc. analyst Matthew Coffina.

The price wouldn’t necessarily be comparable to the total deal size — Cigna of Bloomfield, Conn., is paying $3.8 billion — but as a ratio of the dollar per Medicare Advantage customer Cigna is gaining with the acquisition. Because XLHealth is about a third of HealthSpring in size, that puts the deal in the $1 billion range, suggesting a hefty return for both sponsors.

With 340,000 Medicare Advantage customers in 11 states and Washington for Nashville-based HealthSpring, the $3.8 billion purchase price equates to about $10,000 to $11,000 per customer, Coffina said. If UnitedHealth paid the same for XLHealth, the company’s 113,000 Medicare Advantage customers could bring $1.1 billion to $1.3 billion.

A competitive auction for the company — Bloomberg News reported that WellPoint Inc. and Aetna Inc. were weighing bids — could have brought that price tag upward of $1.5 billion.

With projected revenue for 2012 at $2 billion, the price tag would make sense. Coffina said he could imagine the company selling for .5 times revenue, “to slightly above that. United trades for .5 times revenue.”

XLHealth, founded in 1997, began as a disease management consultant but shifted toward operating its own health plans in 2004, after receiving equity funding from the Goldman Sachs unit. The company focuses primarily on Medicare recipients with special needs including chronic illness and those who are also eligible for Medicaid.

For UnitedHealth, which has an 18% market share in the Medicare Advantage market, the acquisition means not only a geographic expansion but it also gains XLHealth’s expertise on the care for particularly acute patients with chronic conditions, typically the most costly subset of Medicare Advantage patients.

XLHealth does offer other programs such as dual-eligible special needs plans, which could have affected the sales price. The company is expanding its Medicare Advantage plans from six states to 12 in the next year.

About $90 million of MatlinPatterson’s $290 million equity investment in 2007 was targeted toward the acquisition of other businesses, according to filings with the Securities and Exchange Commission.

XLHealth said in a 2007 press release it was acquiring Leprechaun LLC, a Fort Worth company focused on information and clinical services for Medicare Advantage plans.

Medicare Advantage may drive further consolidation, as larger providers such as UnitedHealth and Humana Inc. look to gain greater foothold. Though margins in Medicare Advantage are expected to get slimmer, primarily because of issues surrounding government reimbursement, larger companies could better-handle the slimming.

An enormously profitable sale is especially attractive for MatlinPatterson, a New York investor that specializes in distressed investing. Some of its portfolio companies have suffered in recent years due to economic woes. Miami-based Arrow Air Inc., for one, began liquidation in December 2010 after reorganizing in two previous bankruptcies. The company blamed rising fuel costs and competition for its economic woes. More recently, Ann Arbor, Mich.-based ProQuest, an information services company, suffered multiple ratings downgrades in September.

MatlinPatterson declined to comment for this story.

Robert Reffkin of GS Capital sat on XLHealth’s board until six months ago, when he moved groups. Reffkin declined to comment. Christopher Pechock of MatlinPatterson has been on XLHealth’s board since 2007.

Jefferies & Co.’s Daniel Decelles and Christian Hilliard advised XLHealth. A Sullivan & Cromwell LLP team including partners Keith Pagnani, Melissa Sawyer, Ronald Creamer, Nader Mousavi, Blaze Waleski, Matthew Friestedt and Matt Brennan represented UnitedHealth.

UnitedHealth did not respond to an inquiry.