Breakingviews: Centene CEO defenestration will create value

Bosses that have had an excellent run can be hard to evict when they overstay their welcome. Activist Politan Capital Management has, however, managed to do just that at Centene.

Chief Executive Michael Neidorff has run the $47 billion managed-care company for 25 years and already stayed longer than previously agreed. Before Politan started agitating, the company had planned to keep Neidorff as CEO until the 2023 annual meeting, and executive chairman for a year longer. Politan has helped arrange an earlier exit with a stick and a carrot.

The stick was Centene’s settlement this summer with two U.S. states for claims that it overcharged their Medicaid programs. Moreover, the company took a provision of more than $1 billion for future claims. That reflected badly on the company and its management. Maintaining good relations with state Medicaid programs is key, since they account for a majority of revenue.

The carrot is the potential of repeating what happened at Molina Healthcare. Granted, Centene has created value under Neidorff. Over the past two decades, total returns amount to more than 5,000%, according to Datastream. That’s about 10 times the comparable figure for the S&P 500 Index. Yet Centene trades at about a 20% discount to rival Molina based on estimated earnings over the next 12 months, according to Refinitiv.

Molina’s stock has comfortably outperformed Centene over the past five years thanks to tighter control on margins – its operating margin is about 4% compared with approximately 2.5% at Centene – and better capital allocation. Molina has spent the past few years integrating past acquisitions and repurchasing stock. Centene had already said it aims to improve its margin and return more capital to shareholders, but the new management, appointed by a board with five new members, need to accelerate these plans. Call it a managed-care transition.