Insurer and health-care giant, Aetna Inc. (AET), has agreed to buy managed health care provider Coventry Health Care, Inc. (NYSE:CVH), in a $5.7 billion cash and stock deal.

Aetna Coventry health care buyout

Adding debt assumed, the deal value becomes $7.3 billion. Aetna would pay $42.08 a share for Coventry, in a ratio of 65 percent cash and 35 percent stock.

This represents a 20 percent premium on Coventry’s shares, compared to their close last Friday. Shares of Aetna are quoting at $39.85 (+4.78 percent), while CVH is trading at $41.65 (+19.18 percent).

The deal would give Aetna early mover status in catering to the hugely developing government-funded healthcare coverage, which is expected to see a major boost when millions of Americans, presently uninsured, would become eligible to be covered under the Medicaid enrollment programs in a few months’ time. The acquisition would also give a fillip to Aetna’s Medicare Advantage and Medicare prescription businesses. The deal is expected to increase Aetna’s share of government-related healthcare to 30 percent, from 23 percent. About 5 million customers of Coventry will now add to Aetna’s 36.7 million customers, including 1.5 million on Medicare.

Aetna hopes to make the acquisition operating earnings-accretive next year, with 45 cents a share added in 2014 and 90 cents in 2015.

This is the largest acquisition seen in the health insurance industry in the last five years. Earlier, WellPoint, Inc. (NYSE:WLP) purchased AMERIGROUP Corporation (NYSE:AGP) in a $4.5 billion deal. Last year CIGNA Corporation (NYSE:CI) acquired Healthspring for $3.8 billion.

Last week, we disclosed that David Einhorn’s Greenlight Capital had acquired 6,435,000 shares of CIGNA Corporation (NYSE:CI) at an average of $44 a share, and 6,660,000 shares of Coventry at an average of $31.79 per share. Bloomberg News is reporting that David Einhorn has made $63million off of the Coventry buyout. Einhorn specifically mentioned that shares were being mis-priced due to concerns over health care reform.

Analysts on the whole are positive about the deal.

Says BofA-Merrill Lynch, “Net, we think that the deal is a good one for AET, who has holes to fill in both its Medicare and Medicaid books, and is able to do so at multiples well below what it would have cost to buy pure play operators, although we believe there will be some questions as to why it chose CVH, who also has a large commercial book (mostly individual and small group), which has significant exposure to the risks around HC Reform.”

Wells Fargo says, “We believe this transaction makes sense for both Aetna and Coventry. Coventry adds to several of Aetna’s targeted growth areas (including retail Medicare, Medicaid, and narrow networks), without requiring Aetna to pay too high a multiple, especially considering the $6.00 per share in unregulated cash at Coventry. Aetna had warned transactions needed to be completed before the middle of 2013 (which meant announced relatively soon) to avoid becoming a problem integrating before the significant changes in the health care market, coming in 2014 from health reform.”