The companies announced the deal on Monday, just a week and a half after the U.S. Supreme Court upheld President Barack Obama's healthcare law, which aims to extend coverage to more than 30 million uninsured Americans.

Sources familiar with the deal said the high court decision helped serve as a catalyst to negotiations that took place over several months. Industry analysts expect it to kick off a new wave of acquisitions among insurers.

"With or without healthcare reform, the Medicaid business is extremely lucrative and offers big growth potential," said Oppenheimer analyst Michael Wiederhorn. "A lot of states already want to move their business to Medicaid HMOs. But the Affordable Care Act (healthcare law) would further expand the business, so you get a double bonus."

Combined, WellPoint and Amerigroup will serve more than 4.5 million beneficiaries of state-sponsored healthcare plans, including Medicaid recipients in 19 states, the companies said.

That would increase WellPoint's Medicaid presence from 10 states currently and make it one of the largest Medicaid plan administrators in the United States, alongside competitor UnitedHealth Group Inc.

Wiederhorn sees the deal spurring rivals like Aetna Inc, Cigna Corp or Humana Inc into new acquisitions.

WellPoint is offering $92 per share in cash for Amerigroup, a premium of 43 percent to its closing share price on Friday, one of the highest premiums seen in the sector, analysts said.

WellPoint shares were up 2.8 percent at $61.57 on Monday afternoon and Amerigroup stock was up 38.1 percent at $88.86. Smaller Medicaid players gained on speculation that they will soon be snapped up. Wellcare Health Plans Inc was up 17.4 percent at $62, Molina Healthcare rose 18.2 percent to $27.27 and Centene Corp jumped 19.5 percent to $34.58.

RISKS TO EXPANSION

The U.S. healthcare reform law, passed in 2010, aims to provide coverage for 16 million more Americans through privately run health insurance exchanges in each state, and will expand Medicaid eligibility for an additional 16 million people by raising limits on household income.

But the Supreme Court ruling allowed states to choose whether to participate in the Medicaid expansion. Several Republican governors who opposed the law - including those in Texas, Florida and Louisiana - say they will not take steps to implement it, hoping November elections bring enough Republican wins to repeal it. The law takes full effect in 2014.

WellPoint Chief Executive Angela Braly and other sources involved in the deal said it was not dependent on the U.S. healthcare overhaul. They cited a longstanding trend of government-backed health plans being moved to private companies to hold down costs.

"We expect Medicaid spending under managed-care programs to increase by nearly $100 billion by the end of 2014. These opportunities will develop organically in addition to the Medicaid eligibility expansion under healthcare reform," Braly told analysts on a conference call.

WellPoint may also gain an advantage in providing coverage to so-called dual-eligibles, or some 9 million Americans who meet the criteria for both Medicaid and the Medicare program for the elderly whose care is moving to the private sector, analysts said. Ana Gupte of Sanford Bernstein & Co estimates the shift will generate $4 billion in net profit for insurers.

LITTLE MARKET OVERLAP

Some of Amerigroup's biggest markets include Texas, Florida, Georgia and New York. Company executives and antitrust experts said that other than two or three states, there was little overlap with WellPoint's existing Medicaid business that might draw extra scrutiny from regulators.

In addition to the Department of Justice, state insurance regulators will have to sign off on the buyout.

"It doesn't look like this is anything that would kill the deal," said David Windley, analyst at Jefferies & Co.

WellPoint expects to close the Amerigroup deal in the first quarter of 2013, financed with existing cash, commercial paper and new debt. It is expected to add to WellPoint's earnings per share in 2013. WellPoint left its 2012 earnings-per-share forecast unchanged.

The boost to earnings per share is expected to exceed $1 by 2015, WellPoint said. Analysts had expected the company to earn $9.63 per share in 2015, according to Thomson Reuters I/B/E/S.

The agreement carries a break-up fee of about 3 percent. WellPoint was advised by Credit Suisse and Amerigroup by Barclays and Goldman Sachs.

(Reporting by Debra Sherman in Chicago; Additional reporting by Nadia Damouni, Ransdell Pierson and Soyoung Kim in New York, Toni Clarke in Boston and Esha Dey in Bangalore; Editing by Michele Gershberg, John Wallace, Matthew Lewis and Andrew Hay)

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