UnitedHealth Group Inc.’s UNH -1.76% $4.3 billion deal to take over Brazil’s Amil Participações SA AMIL3.BR +0.03% represents a major bet on the international future of the health-care business, part of a broader effort by American insurers and hospital operators to seek growth overseas.

Health Check

UnitedHealth Group

  • 2011 revenue: $101.86 billion
  • Medical members in 2011: 34.57 million
  • HQ: Minnetonka, Minn.

Amil Participações

  • 2011 revenue: $4.45 billion
  • Medical members in 2011: 4.3 million
  • HQ: Rio de Janeiro

Source: the companies

The biggest U.S. health insurer said Monday it will buy 90% of Amil, which is Brazil’s largest health insurer as well as an operator of hospitals and clinics, for $4.9 billion in cash, a price offset by tax benefits the company estimated at around $600 million. The company said the acquisition will enter it into the rapidly growing health market in Brazil, where the expanding middle class is increasingly turning to private coverage.

“We believe we have never seen a more compelling opportunity for growth, value and service,” said UnitedHealth group Chief Executive Stephen J. Hemsley in a conference call with analysts. He compared Brazil’s potential to the U.S. market several decades ago.

UnitedHealth’s acquisition is the highest-profile commitment so far by a U.S. health-care firm to foreign operations—part of a broader trend as American companies seek faster-growing markets overseas. In the U.S. market, regulation “is going to continue to be pretty onerous” for insurers under the federal health overhaul, said David Windley, an analyst with Jefferies & Co. Among health plans, Cigna Corp. CI +0.34%and Aetna Inc. AET -0.28% have been working to expand internationally, and UnitedHealth has also taken some steps, though on a smaller scale than its Brazilian deal.

Hospital operators, including well-known U.S. nonprofits like Johns Hopkins Medicine and the Cleveland Clinic, have also been forging pacts to operate or advise hospitals outside the U.S. Overseas, there’s strong demand for their management and medical technology, while in the U.S. providers face reimbursement pressures, said Paul Mango, director at McKinsey & Co. The UnitedHealth deal is just the latest sign of “the globalization of the U.S. health-care sector,” he said. “It’s a demand for U.S. expertise on both the health-care provider and the health-plan side.”

Analysts said UnitedHealth is paying a relatively generous price, estimated at around 23 times Amil’s projected 2013 earnings per share by Deutsche Bank DBK.XE +2.32% . But, analysts said, the figure appears justified by the expansion potential in Brazil, where only about a quarter of the population currently has private health insurance.

UnitedHealth said the deal would add to its earnings in 2013. “Growth in Brazil will exceed that in the U.S. for the foreseeable future,” said Chris Rigg, an analyst with Susquehanna Financial Group.

In an interview, UnitedHealth Chief Financial Officer David S. Wichmann said the company had been eyeing Brazil for more than a decade, and because of the current economic and political environment, “we think this is the right time to enter into the market.”

Though the Brazilian government offers health-care services, budget constraints have left the public system strained. The country’s burgeoning middle class is increasingly gaining private coverage, partly because employers are providing it as a benefit. Brazilian brokerage Votorantim Corretora projects that the current total of around 48 million Brazilians with private insurance will grow to 54 million in 2015, while the largely fragmented business, with more than 1,000 companies, will likely continue to consolidate. In a report before the UnitedHealth announcement, the firm said that Amil was well positioned because of its size and its ownership of health-care providers.

With revenue last year of approximately $4.45 billion, Amil provided health insurance to 4.3 million people and dental coverage to 1.52 million. It also owns 22 hospitals and about 50 clinics, a combined model that is relatively rare in the U.S. but gaining more attention.

The UnitedHealth deal may face a regulatory challenge because of Brazilian restrictions on foreign ownership of hospitals. But UnitedHealth and Amil said they expected their combination to win approval because Amil is a managed-care firm, not primarily a hospital operator. UnitedHealth said it expected to close the acquisition in two parts, concluding in the first half of 2013.

Walfrido Jorge Warde Jr., a member of the Civil Law Commission at the Brazilian Bar Association who wasn’t connected to the UnitedHealth deal, agreed the acquisition should get a green light from authorities, because Amil’s hospitals are under its health plan, and they are essential to its health-insurance services.

In a press conference in São Paulo, the CEO of Amil, Edson Bueno, said, “The money will stay here [in Brazil], we will invest here and generate jobs here.”

UnitedHealth said Amil will operate under its current brand and continue to be run from Brazil by Dr. Bueno, who with his partner will retain a 10% stake in the company. Dr. Bueno will also purchase approximately $470 million in UnitedHealth stock, becoming the U.S. company’s largest individual shareholder, and join the UnitedHealth board. Dr. Bueno said he will remain in charge of Amil for the next five years and prepare the ground for a successor.

Amil aims to boost its revenue by at least 10% a year, he said.

From: Anna Wilde Matthews and Jon Kamp, Wall Street Journal, 10/09/2012