Company: Centene Corp. (CNC)
Business: Centene operates as a multi-national health-care enterprise that provides programs and services to under-insured and uninsured individuals in the United States. Its Managed Care segment offers health plan coverage to individuals through government-subsidized programs, including Medicaid, state children’s health insurance programs, long-term services and support, foster care, and Medicare-Medicaid plans. The Specialty Services segment provides pharmacy benefits management services; nurse advice line and after-hours support services; and vision and dental services, as well as staffing services to correctional systems and other government agencies; and services to Military Health System eligible beneficiaries. This segment offers its services and products to state programs, correctional facilities, healthcare organizations, employer groups, and other commercial organizations.
Stock Market Value: $44.2B ($75.86 per share)
Activist: Politan Capital Management
Percentage Ownership: ~2.0%
Average Cost: n/a
Activist Commentary: Politan Capital Management was founded by Quentin Koffey. Most recently, Koffey led the activism strategy at Senator Investment Group. Prior to that, he led the activist practice at DE Shaw and before that he was at Elliott Associates. Koffey is operating Politan more like a private equity fund than a traditional long-short equity hedge fund, as it can draw down locked up capital to give it enough time to accomplish its goals through active engagement with boards and management teams to improve governance, operations or strategic direction. Politan looks for (i) high quality businesses that underperform their peers or potential, (ii) where there is a clear fix and (iii) a clear pathway to implement that fix.
What’s Happening?
On Nov. 3, 2021, the Wall Street Journal reported that Politan Capital took a stake in Centene.
Behind the Scenes:
Centene is a managed care organization that provides health plan coverage to individuals through government-subsidized and commercial programs. Centene is hired by states, and it works to improve the quality of care for Medicaid beneficiaries, as well as those of other government programs. The company receives a contracted premium per member and is responsible for medical costs. This reprices annually. Centene provides its services to many states, which in turn also work with Centene’s peers. This leads to a very stable, predictable revenue flow for Centene. Moreover, the states work with Centene and its peers to produce actuarially sound margins, preventing these companies from making or losing a windfall on their services.
This is a very low margin business, with net profit margins from 2% to 4%. When 2 percentage points of margin is the difference between doubling your profits or not, the valuation of these businesses largely depends on how costs are managed. In this regard, Centene has been significantly underperforming its peers with a 2.4% profit margin versus WellCare (which Centene recently acquired) at 4.2% and Molina Healthcare at 4.5%. Part of the reason why Centene’s margins lag its peers is because it has been growing primarily through acquisitions, most recently acquiring WellCare at a transaction valued at $19.6 billion. These acquisitions need to be integrated and operations need to be centralized.
Fortunately, there is clear a roadmap to success here, as this is exactly what management at WellCare and Molina did to bring their margins up. But, this process has to start at the Board, and this is where Koffey’s activist expertise will come into play. Historically, he has partnered with experienced industry operators as board candidates (i.e., CoreLogic – Bill Foley, Lowe’s – David Batchelder) and in this situation he has brought in Kenneth Burdick and Wayne DeVeydt. Burdick is the former CEO of WellCare who oversaw its margin improvement and DeVeydt is the former CFO of Anthem Inc. They are obvious choices to add to the board and with five spots up this year on the company’s Board, we expect Politan to name two additional and likely diverse nominees.
This is a board that is desperately in need of refreshment – the average tenure of the current Board is 11 years and the average age of the directors is 70 (both would be higher but for the new directors added only because of the WellCare merger). Over half the board has a tenure of over 15 years (versus 1% of all S&P 500 directors). The company’s CEO is 78 years old and has served on the board for 25 years. Its lead director is 87 years old, has also served on the board for 25 years and has been lead director that entire time (versus an average lead director’s tenure of four years for S&P 500 companies). This company needs for the first time since it went public, a board of experienced directors and fresh eyes to hold management accountable and develop a comprehensive succession plan.
Politan’s style is to amicably and quietly work with management to achieve its objectives. They do not send angry public letters, and they do not seek proxy fights. However, they will also not back down from a proxy fight if their hand is forced: Koffey showed that at CoreLogic and Hess. Politan is likely going to strongly advocate for Burdick and DeVeydt as directors. In the end, they will be more focused on how qualified and engaged the directors are – and less concerned with where they came from. This is a situation that should settle, but if this does go to a proxy fight, we expect that Politan will prevail. A new board that holds the right management team accountable can replicate what Burdick did at WellCare, and getting the margins to 4.5% could lead to a tripling of the company’s stock price.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.