Cigna Will Purchase Healthsource

Cigna Corp. on Friday agreed to buy Healthsource Inc. for $1.7 billion in cash and assumed debt, vaulting it into third place among U.S. health maintenance organizations.

The purchase of Hooksett, N.H.-based Healthsource for $21.75 a share and $250 million in assumed debt will give Cigna 12.3 million customers in 29 states.

Cigna, based in Philadelphia, said the acquisition makes it more competitive in the consolidating insurance industry. It helps the life, health and business insurer gain on top-ranked managed-care provider Aetna Inc. and second-place United HealthCare Corp. by expanding in the U.S. Southeast.

“It gives [Cigna] deeper coverage in the Northeast and new coverage in the Southeast,� Merrill Lynch & Co. analyst Michael Frinquelli said. “Put it all together--it looks like a nice deal for them.�

Healthsource shares soared $4 to close at $20.875, after gaining 30% on takeover speculation in the three weeks before the purchase. Cigna shares gained 25 cents to close at $152.875, also on the New York Stock Exchange.

The price gives Healthsource shareholders a 29% premium above Thursday’s close. The acquisition is expected to start adding to Cigna’s earnings next year, and the insurer expects to save $75 million annually in costs by eliminating overlapping divisions.

Cigna plans to pay for the acquisition by selling $650 million in bonds, with a combination of bank loans and its own cash making up the remainder. As a result of the purchase, the company plans to stop buying back its own shares.

Cigna wouldn’t say how many of the 49,200 employees at the combined company would lose their jobs. The purchase is expected to boost Cigna’s HMO business in Georgia, North Carolina and Tennessee, while bringing it into South Carolina. It would also expand its HMO into Maine, New Hampshire, Kentucky, Arkansas and Indiana.