The percentage of ownership:  ~2.0%

Average Cost: n/a

Commentary of an activist:Quentin Koffey was the founder of Politan Capital Management. Koffey was most recently the leader of Senator Investment Group’s activism strategy. Before that, Koffey was the leader of DE Shaw’s activist practice. He previously worked at Elliott Associates. Politan is operated more as a long-short equity hedge funds than traditional private equity ones. Politan can access locked capital and draw down the money to allow it to achieve its goals. Politan also engages with management teams and boards to enhance governance, operations, or strategic direction. Politan is looking for high quality businesses with a potential to outperform peers and/or their potential.

Centene is a managed care organization that provides health plan coverage to individuals through government-subsidized and commercial programs. Centene’s employees are state-employed and work to improve care for Medicaid beneficiaries. It is responsible for paying medical costs and receives a contract premium. These prices are set annually. Centene is available to provide its services to numerous states. These state in turn work with Centene and their peers. Centene’s revenue streams are predictable, stable and predictable. Centene is supported by the state to ensure that Centene’s peers have actuarially sound margins. These companies are prevented from making or losing any money.

It is a low-margin business with net profits margins of 2% to 4.4%. The difference between double or not is 2 percentage points. This means that the cost management of these businesses will determine how they are valued. Centene’s profit margin has been 2.4%, compared to WellCare at 4.2% (which Centene just acquired) and Molina Healthcare 4.5%. Centene’s margins are lower than its peers because of acquisitions. Most recently, Centene acquired WellCare in a $19.6 billion transaction. This acquisitions must be integrated, and operations should be centralized.

It is evident that there is clearly a path to success. This is what WellCare and Molina managed to do to increase their margins. This process must start at the Board and Koffey will bring his activist skills to this table. Historically, he has partnered with experienced industry operators as board candidates (i.e., CoreLogic – Bill Foley, Lowe’s – David Batchelder) and in this situation he has brought in Kenneth Burdick and Wayne DeVeydt. Burdick was the CEO of WellCare and oversaw the company’s margin improvements. DeVeydt, on the other hand, is Anthem Inc.’s former CFO. These are both obvious candidates to join the Board. Politan has five open spots on this year’s Board. We expect Politan will name two more diverse and possibly different nominees.

This is a board that is desperately in need of refreshment – the average tenure of the current Board is 11 years and the average age of the directors is 70 (both would be higher but for the new directors added only because of the WellCare merger). Over half the board has a tenure of over 15 years (versus 1% of all S&P 500 directors). The CEO of the company is 78 and has been on the board for over 25 years. Its lead director is 87 years old, has also served on the board for 25 years and has been lead director that entire time (versus an average lead director’s tenure of four years for S&P 500 companies). The company requires a new board with fresh eyes and experience to oversee its management and create a succession plan.

Politan works quietly and amicably with managers to reach their goals. They don’t send out angry public letters and do not want proxy fights. They will not back down from a proxy battle if they are forced to: Koffey demonstrated that at CoreLogic, Hess. Politan will likely strongly support Burdick or DeVeydt for the role of directors. In the end, they will be more focused on how qualified and engaged the directors are – and less concerned with where they came from. While this is something that will be resolved, we believe Politan will win if there is a proxy fight. The new board can mirror the WellCare management system. A revised board could also hold the correct managers accountable. This would allow for a threefold increase in the stock price.

Ken Squire founded 13D Monitor and is its president. The institutional research company focuses on shareholder activism.