Big Brazil Health Insurance Deal May be Tough to Replicate

By Brad Haynes | October 9, 2012

With a $4.9 billion takeover of Brazil’s biggest healthcare provider, UnitedHealth Group appears to have snatched the crown jewel in a market with plenty of promise but formidable barriers to entry for any foreign rivals looking to follow suit.

UnitedHealth’s plan to acquire a 90 percent stake in Amil Participacoes SA, disclosed on Monday, removes one of the only obvious options for fast growth via takeover — mainly because Brazil’s healthcare sector is so fragmented.

More active regulation from Brazil’s left-leaning government may also deter other foreign firms. President Dilma Rousseff has stepped up enforcement of quality standards in a number of industries from healthcare to telecoms, and in some cases has forbidden companies from selling their products until they make investments to improve services.

Despite such barriers, Brazil clearly offers growth possibilities that richer countries cannot. Robust economic growth has lifted more than 40 million people out of poverty and into the middle class over the past decade — and they’re buying everything from new TVs to better health plans.

About a quarter of Brazilians are now covered under private health plans, compared to nearly two thirds of the working adult population in the United States.

The field of providers looking to exploit that demand shrank by half in the decade through 2010, but has stabilized since at about 1,000 companies, according to healthcare regulator ANS.

Amil, which was founded 34 years ago by Chief Executive Edson de Godoy Bueno, holds about 10 percent of Brazil’s private health insurance market — more than twice the market share of its nearest rivals.

The health insurance units of Banco Bradesco and diversified insurer Sul America may also be tough to extract from their parent companies at appealing prices.

The rest of the industry consists mostly of small regional providers and branches of the medical cooperative Unimed.

UnitedHealth’s bid for Amil is not likely to affect the valuation of rivals such as Sul America, Raymond James analyst Guilherme Assis told clients in a note, as rivals cannot match Amil’s scale and consistent results in the healthcare sector.

The greatest consolidating force may continue to be Amil, which grew to its market-leading position with the acquisition of Medial Saude in 2009 and expanded its operations in the northeast region by buying Excelsior Saude and ASL in 2010.

Amil is looking at more acquisitions to continue expanding its market share, CEO Bueno told reporters on Monday.

The company may also benefit from UnitedHealth’s multinational clients with employees in Brazil, Santander analyst Daniel Gewehr told clients in a note, which may pose additional barriers to foreign rivals.

Meanwhile, foreign investors are growing more wary of Brazil as Rousseff’s administration demonstrates a readiness to intervene in the economy to demand better services and lower prices from companies.

Just last week ANS blocked 38 providers from selling coverage of 301 health plans for three months due to excessive wait times for exams and surgery.

Elsewhere in the economy, Brazil’s telecom regulator suspended sales of some cell phone carriers until they presented plans for investments to improve their services. And Rousseff announced negotiations to sharply lower rates on electric utility concessions in order to boost industrial competitiveness — a move that wiped out a quarter of some companies’ market value in a day.

In the short-term, the competition from a UnitedHealth may weigh on shares of Brazilian healthcare providers such as Sul America, Tempo and Odontoprev, said Assis of Raymond James.

UnitedHealth’s pricing power could also hurt providers of diagnostics services such as Dasa and Fleury, Assis said, adding that Fleury could struggle more as Amil’s founder Bueno is the main shareholder of Dasa.

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