Yesterday, UnitedHealth Group (UNH) announced the commencement of its cash tender offer to purchase $200 million of short-term notes and $550 million of intermediate-term notes. The offer will expire on Feb 3, 2010.

The buyback, which will be funded by cash in hand and proceeds from the sale of commercial paper, will be made through a modified Dutch auction. The notes buyback will reduce the company’s interest burden, thereby strengthening the balance sheet.

UnitedHealth has been active in managing its debt. Following a significant increase in debt issuance in 2007 and 2008 and a decline in operating performance, the company’s debt-to-EBITDA increased to over 2X in 2008. Through the first three quarters of 2009, the company’s annualized debt-to-EBITDA has improved to 1.5x. During this time, the company reduced its debt levels by retiring $1.4 billion of long term debt with $12.8 billion of debt outstanding.

With a debt-capital ratio of 32.8%, the company stood comfortably in terms of interest payments, witnessed by the interest coverage ratio of 8.9:1.0. This move by the company to retire a total $750 million of debt will strengthen the balance sheet and enable it to meet financial obligations. We believe the company’s financial leverage will further improve in 2010.

Despite the unfavorable commercial enrollment environment driven by ongoing difficult global economic conditions as well as a challenging capital market, UnitedHealth has continued to produce respectable operating margins and cash flow, albeit at levels somewhat lower than those achieved in the previous years.

UnitedHealth expects to release its fourth quarter results on Jan 21, 2010, with the Zacks Consensus Estimate of a gain of 73 cents per share. Prior to the fourth quarter earnings release, we maintain a Neutral recommendation on the shares.

Zacks Investment Research

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