UnitedHealth/Catamaran

Overview

On an acquisition of Catamaran (a Canadian public company with a U.S.-focused pharmacy claims management business) under a Yukon Plan of Arrangement by Purchaser, each Catamaran shareholder will receive $61.50 per common share in cash. However, in order to accomplish a partial "de-sandwiching" of the resulting structure, the cash proceeds will be bifurcated. Approximately $18 to $24 per share (or $3.7B to $5B in total) will be received as a result of a (presumably non-Canadian) subsidiary of UnitedHealth Group lending to an indirect LLC subsidiary of Catamaran, with those funds being indirectly distributed to Catamaran which, in turn, will distribute those funds to its shareholders as redemption proceeds for preferred shares - which were issued to them under a s. 86 reorg. The balance of the $61.50 per share will be paid by Purchaser for the "Class X" common shares of Catamaran (also issued under the s. 86 reorg.)

Catamaran

A Yukon corporation trading on the TSX and NASDAQ whose principal executive offices are in Illinois. It has two business segments carried on in the U.S. and Canada: a pharmacy benefits management business (in which it processes one out of five prescription claims made in the U.S.); and health care information technology.

UnitedHealth Group

UnitedHealth Group Incorporated, a Minnesota corporation listed on the NYSE with a market cap of $113B, providing health care coverage and benefits services; and (through Optum) information and technology-enabled health services.

Purchaser

A wholly-owned B.C. subsidiary of UnitedHealth Group formed solely to engage in the contemplated transactions.

Company Sub 1

A Delaware wholly-owned subsidiary of Catamaran.

Company Sub 2

A Texas indirect wholly-owned subsidiary of Catamaran (and direct sub of Company Sub 1) which owes $2B to Luxco.

Company Sub 3

Catamaran PBM of Illinois, Inc., an indirect wholly-owned subsidiary of Catamaran (and direct sub of Company Sub 2) owing $350M to Luxco.

Luxco

Catamaran S. à r. L., a wholly-owned Luxembourg subsidiary of Catamaran.

Parent Sub

A subsidiary of UnitedHealth Group to be designated by it.

Plan of Arrangement

1. Purchaser will subscribe for one common share of Catamaran for $61.50 in cash;
2. Parent Sub will lend an amount to Company Sub 2 sufficient to fund the preferred share redemptions in 13 below;
3. Company Sub 2 will repay all or part of a $275M note owing by it to Catamaran;
4. A dividend or capital distribution will be made by Company Sub 2 to Company Sub 1;
5. Company Sub 2 will repay all or part of the $2B owing by it to Luxco;
6. Company Sub 2 will make a cash contribution to Company Sub 3;
7. Company Sub 3 will repay all or part of the $350M owing by it to Luxco;
8. Luxco will make a capital or dividend distribution to Catamaran;
9. Company Sub 1 will make a capital or dividend distribution to Catamaran;
10. each outstanding stock option, RSU award and PBRSU award granted prior to January 1, 2014 will be cancelled for the cash consideration;
11. each of the common shares held by dissenting holders will be transferred to Purchaser in exchange for a right to be paid the fair value thereof;
12. Catamaran will undertake a s. 86 reorganization of capital pursuant to which: (A) the authorized share capital of Catamaran will be amended to create two new classes of shares consisting of "class X common shares" carrying four votes per share and preferred shares which will be redeemable and retractable for a redemption price which will not exceed the paid-up capital of each common share immediately before the share exchange; and (B) each existing common share of Catamaran (other than any common shares owned by Purchaser) will be automatically exchanged for a newly created preferred share and one-half of a newly-created class X common share, with the stated capital of each preferred share being equal to the redemption consideration and the remainder of the paid-up capital of the common shares immediately before the share exchange being allocated to the stated capital of the class X common shares;
13. each preferred share will be redeemed by Catamaran for a cash redemption price equal to the redemption consideration;
14. each class X common share will be transferred to Purchaser for a cash purchase price equal to the product of (i) $61.50 minus the redemption consideration and (ii) two;
15. each outstanding stock option, RSU award and (performance-based) PBRSU award granted on or after January 1, 2014 will be converted into a UnitedHealth Group share-based option, RSU or PBRSU, as the case may be; and
16. Catamaran's employee share purchase plan will be terminated.

Canadian tax consequences

S. 86 exchange. The share exchange in 12 should not result in the realization of a capital gain (or capital loss) to a Canadian holder.

Pref redemption

The paid-up capital of the preferred shares will be equal to the portion of the arrangement consideration to be paid on the redemption of the preferred shares. Accordingly, a deemed dividend will not arise to Canadian holders on the share redemption in 13.

Taxable exchange

Exchange of Class X shares for cash in 14 will occur on a taxable basis.

U.S. tax consequences

Integrated transaction. The exchange of common shares for class X common shares and preferred shares, the redemption of the preferred shares, and the purchase of the class X common shares pursuant to the plan of arrangement should be treated as an integrated transaction pursuant to which each holder of common shares immediately prior to the consummation of the arrangement should be treated as receiving the arrangement consideration in exchange for common shares.

Dividend alternative

However, the IRS might successfully assert that the portion of the arrangement consideration paid by Catamaran in redemption of the preferred shares (expected to be in the range of $18 to $24 per common share) should instead be treated as a distribution by Catamaran with respect to common shares, followed by a purchase of common shares by UnitedHealth Group. If the transaction were so characterized, a U.S. holder would recognize dividend income equal to the lesser of the portion of the arrangement consideration paid in redemption of the preferred shares and the portion of the arrangement consideration that would be treated as paid out of Catamaran's current or accumulated earnings and profits. The portion of the arrangement consideration that would be treated as paid out of Catamaran's current or accumulated earnings and profits is expected by Catamaran to be materially less than the portion paid in redemption of the preferred shares.

PFIC rules

Catamaran believes that it currently is not a PFIC for U.S. federal income tax purposes and that it has not been a PFIC in prior taxable years.