How activist investor Politan Capital can raise profitability at Centene

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Firm: Centene Corp. (CNC)

Enterprise: Centene operates as a multi-national health-care enterprise that gives applications and companies to under-insured and uninsured people in the US. Its Managed Care section gives well being plan protection to people via government-subsidized applications, together with Medicaid, state kids’s medical insurance applications, long-term companies and assist, foster care, and Medicare-Medicaid plans. The Specialty Companies section supplies pharmacy advantages administration companies; nurse recommendation line and after-hours assist companies; and imaginative and prescient and dental companies, in addition to staffing companies to correctional programs and different authorities companies; and companies to Army Well being System eligible beneficiaries. This section gives its companies and merchandise to state applications, correctional amenities, healthcare organizations, employer teams, and different business organizations.

Inventory Market Worth: $44.2B ($75.86 per share)

Activist: Politan Capital Administration

Proportion Possession:  ~2.0%

Common Value: n/a

Activist Commentary: Politan Capital Administration was based by Quentin Koffey. Most not too long ago, Koffey led the activism technique at Senator Funding Group. Previous to that, he led the activist apply at DE Shaw and earlier than that he was at Elliott Associates. Koffey is working Politan extra like a non-public fairness fund than a standard long-short fairness hedge fund, as it will possibly draw down locked up capital to present it sufficient time to perform its targets via lively engagement with boards and administration groups to enhance governance, operations or strategic course. Politan appears to be like for (i) top quality companies that underperform their friends or potential, (ii) the place there’s a clear repair and (iii) a transparent pathway to implement that repair.

What’s Occurring?

On Nov. 3, 2021, the Wall Road Journal reported that Politan Capital took a stake in Centene.

Behind the Scenes:

Centene is a managed care group that gives well being plan protection to people via government-subsidized and business applications. Centene is employed by states, and it really works to enhance the standard of take care of Medicaid beneficiaries, in addition to these of different authorities applications. The corporate receives a contracted premium per member and is answerable for medical prices. This reprices yearly. Centene supplies its companies to many states, which in flip additionally work with Centene’s friends. This results in a really steady, predictable income circulate for Centene. Furthermore, the states work with Centene and its friends to provide actuarially sound margins, stopping these corporations from making or shedding a windfall on their companies.

It is a very low margin enterprise, with internet revenue margins from 2% to 4%. When 2 proportion factors of margin is the distinction between doubling your earnings or not, the valuation of those companies largely relies on how prices are managed. On this regard, Centene has been considerably underperforming its friends with a 2.4% revenue margin versus WellCare (which Centene not too long ago acquired) at 4.2% and Molina Healthcare at 4.5%. A part of the rationale why Centene’s margins lag its friends is as a result of it has been rising primarily via acquisitions, most not too long ago buying WellCare at a transaction valued at $19.6 billion. These acquisitions should be built-in and operations should be centralized.

Fortuitously, there’s clear a roadmap to success right here, as that is precisely what administration at WellCare and Molina did to deliver their margins up. However, this course of has to start out on the Board, and that is the place Koffey’s activist experience will come into play. Traditionally, he has partnered with skilled trade operators as board candidates (i.e., CoreLogic – Invoice Foley, Lowe’s – David Batchelder) and on this state of affairs he has introduced in Kenneth Burdick and Wayne DeVeydt. Burdick is the previous CEO of WellCare who oversaw its margin enchancment and DeVeydt is the previous CFO of Anthem Inc. They’re apparent selections so as to add to the board and with 5 spots up this 12 months on the corporate’s Board, we anticipate Politan to call two extra and sure numerous nominees.

It is a board that’s desperately in want of refreshment – the common tenure of the present Board is 11 years and the common age of the administrators is 70 (each could be increased however for the brand new administrators added solely due to the WellCare merger). Over half the board has a tenure of over 15 years (versus 1% of all S&P 500 administrators). The corporate’s CEO is 78 years previous and has served on the board for 25 years. Its lead director is 87 years previous, has additionally served on the board for 25 years and has been lead director that complete time (versus a mean lead director’s tenure of 4 years for S&P 500 corporations). This firm wants for the primary time because it went public, a board of skilled administrators and contemporary eyes to carry administration accountable and develop a complete succession plan.

Politan’s fashion is to amicably and quietly work with administration to realize its goals. They don’t ship indignant public letters, and they don’t search proxy fights. Nonetheless, they may even not again down from a proxy struggle if their hand is pressured: Koffey confirmed that at CoreLogic and Hess. Politan is probably going going to strongly advocate for Burdick and DeVeydt as administrators. Ultimately, they are going to be extra centered on how certified and engaged the administrators are – and fewer involved with the place they got here from. It is a state of affairs that ought to settle, but when this does go to a proxy struggle, we anticipate that Politan will prevail. A brand new board that holds the proper administration workforce accountable can replicate what Burdick did at WellCare, and getting the margins to 4.5% might result in a tripling of the corporate’s inventory value.

Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.

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