CareFirst shunned rival $1.3 billion bid

Trigon dangled cash but had problems, stirred layoff fears

March 09, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross Blue- Shield, which wants to sell itself to WellPoint Health Networks Inc for $1.3 billion, had another $1.3 billion offer, according to filings with the Maryland Insurance Administration.

The other bidder, Trigon Inc. of Virginia, offered more cash and less stock but, according to CareFirst, posed more risk of layoffs and had other problems that led CareFirst's board to choose WellPoint.

The account of the Trigon offer came in testimony and exhibits filed by CareFirst for next week's hearings on the deal to be conducted by Insurance Commissioner Steven B. Larsen. Larsen must decide whether it is in the public interest to let CareFirst, which insures 3.1 million people, be sold.

Larsen wants to be sure that if he allows the company to be sold, CareFirst will have gotten the best deal possible. Since CareFirst is a nonprofit, it effectively is owned by the public, and the purchase price will be paid to foundations in Maryland, Delaware and the District of Columbia, where CareFirst operates.

Some critics of the deal have called the process used by CareFirst flawed.

"The open market is the best way to set the price and conditions for a sale - otherwise it's just a sweetheart deal between two self-interested parties," said Calvin Pierson, president of the Maryland Hospital Association, who wants CareFirst to remain local and nonprofit.

In their prepared testimony for Larsen's hearings, Daniel J. Altobello, chairman of CareFirst's board, and Stuart F. Smith, an investment banker who advised CareFirst, outlined CareFirst's reason for selecting WellPoint.

Both Altobello and Smith, who is managing director of Suisse First Boston Corp., were unavailable yesterday for comment.

In their testimony, both used the term "auction" to describe CareFirst's solicitation and consideration of offers. Because Blue Cross rules effectively mean Blues plans can only be sold to other Blues, industry speculation had centered on three potential buyers for CareFirst, all publicly traded Blues operators.

WellPoint, based in California, owns Blues plans there and in Georgia and Missouri. Virginia-based Trigon, which has said it wants to expand in the region, tried to buy the Georgia Blues, but was outbid by WellPoint in a sale that closed last year. Anthem, based in Indiana, operates Blues plans in eight states.

Altobello's testimony said Anthem sought to bid on CareFirst, but CareFirst's board and Credit Suisse "believed that Anthem did not possess the financial wherewithal to complete a transaction." Anthem has declined comment on any dealing with CareFirst.

According to the filings, WellPoint initially offered $1.25 billion for CareFirst last March, but in subsequent negotiations increased its bid to match that of Trigon. Trigon was offering $780 million in cash and the rest in stock; WellPoint has offered $450 million in cash and the rest in stock. Wary of getting stock, some Maryland legislators have introduced a bill that would require the full purchase price be paid in cash.

However, according to Smith's testimony, the value of WellPoint's offer was fixed at $1.3 billion, while the value of Trigon's would drop if Trigon stock dropped below $50 a share. (It was trading at $65.30 a share when CareFirst signed the WellPoint deal in November.) Because of that, Smith said, Credit Suisse told CareFirst that WellPoint's deal "was the financially superior offer."

Altobello listed other reasons the board preferred WellPoint:

Although Trigon promised in writing that the deal would result in no layoffs, he said, the board believed because Trigon is so much smaller than WellPoint, a Trigon affiliation "would have resulted in substantial layoffs."

Although Trigon agreed that William L. Jews, CareFirst's chief executive officer, would be chairman of Trigon after an acquisition, "the operational management proposed by Trigon was simply unworkable and would have resulted in confusion in leadership," with Jews running CareFirst but also reporting to Trigon's CEO, Thomas G. Snead Jr.

"Trigon had proposed to move the headquarters of the public company from Richmond to Maryland. Subsequently, that proposal was withdrawn," which would have caused "an adverse impact on Maryland employees."

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