Health insurer WellPoint Inc. (WLP) on Tuesday said it has agreed to buy WellChoice Inc. (WC) for nearly $6.5 billion in cash and stock, in a deal that would give WellPoint a stronger presence in the U.S. Northeast.

WellPoint said the combined company will now serve more than 33 million medical members as a Blue Cross or Blue Cross Blue Shield (search) licensee in 14 states and through its HealthLink and UniCare subsidiaries.

WellChoice is the largest health insurer in New York State and the parent of Empire Blue Cross Blue Shield.

"We see a very compelling strategic fit and see our combined companies strongly positioned to compete in the marketplace," Larry Glasscock, WellPoint chief executive officer, told analysts and investors on a conference call.

The merger will strengthen WellPoint's leadership in providing health benefits to large employers with multi-state operations, WellPoint said.

"The deal would surprise no one, and the proposed price, at $77 per share, would be neutral to slightly accretive to earnings, by our calculations," said CIBC analyst Carl McDonald in a research note on Tuesday before the deal was announced.

Under the deal, which is structured as a merger, WellPoint will pay WellChoice shareholders $77.23 in cash and stock.

WellChoice shareholders will get $38.25 in cash and 0.5191 shares of WellPoint for each share of WellChoice.

The deal gives WellChoice shareholders a premium of about 9.4 percent, based on WellChoice's closing price of $70.60.

Shares of WellChoice rose nearly $4.81, or 7 percent to $75.41 on the New York Stock Exchange (search), while shares of WellPoint slipped 3 cents to $75.06 on the exchange.

The two companies said that the deal is expected to be neutral to 2006 earnings and accretive thereafter. It is expected to close in the first quarter of 2006.

WellChoice CEO Michael Stocker will become president and chief executive officer of a newly combined Northeast region of WellPoint, the company said.

Merrill Lynch analyst Doug Simpson, in a research note before the deal was announced, said a WellChoice acquisition was consistent with WellPoint's strategy of consolidating Blues plans. He said the primary benefit of a deal would be cost synergies.

The companies expect at least $25 million in pre-tax cost savings in 2006 and about $50 million in 2007. By 2010, WellPoint expects annual pre-tax savings of at least $125 million.

CIBC'S McDonald said the deal makes sense, given that Blue Cross regulations mandate that at least two-thirds of revenue come from Blue-branded products.

Buying WellChoice would give WellPoint the capacity to acquire additional non-Blue revenue in future years. That's important because the pipeline of the non-profit Blue Cross conversions has slowed dramatically, said McDonald, adding that WellChoice represents the only other remaining public Blue.

The New York Public Asset Fund, which currently owns about 52 million shares of WellChoice common stock, will receive about $1.989 billion in cash and about 27 million shares of WellPoint common stock from the merger based on Monday's closing stock price.

The New York Public Asset Fund has agreed to vote its shares, representing some 62 percent of the outstanding shares of WellChoice Inc., in favor of the transaction.

WellChoice was advised by Lazard Ltd. in the deal.