CareFirst deal seems likely to go ahead

Assembly legislation isn't expected to kill insurer's sale to WellPoint

Buyer needs to study two bills

All-cash requirement not viewed as fatal to $1.3 billion proposal

April 10, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

CareFirst BlueCross Blue- Shield and WellPoint Health Networks Inc. will probably go ahead with their deal, despite restrictions imposed by the Maryland legislature, a number of people close to the process predicted yesterday.

CareFirst, the state's largest nonprofit health insurer, wants to convert to for-profit status and sell itself to WellPoint. Although the contract between companies calls for WellPoint to pay $850 million in stock and $450 million in cash, Maryland lawmakers voted that the deal should be all in cash.

WellPoint, based in Thousand Oaks, Calif., said it would review the legislation before deciding whether to go ahead.

"We haven't even gotten the final bills yet," Ken Ferber, WellPoint's vice president for corporate communications, said yesterday of the legislation passed Monday night in the waning hours of the General Assembly.

Company executives had previously said the all-cash requirement could be a deal-breaker.

"If WellPoint is truly interested in buying [CareFirst] Blue Cross - and I think it is - it will bring an amended proposal to the insurance commissioner," said House Speaker Casper R. Taylor Jr. "There's no question we had deal-breakers on the table, but we took them off."

Clifford A. Hewitt, vice president for health research at Legg Mason Wood Walker, who follows WellPoint and other publicly traded insurers, said he didn't think the all-cash requirement would scuttle the deal.

"Money is fungible," he said. "My sense is that WellPoint isn't going to back off."

Walter Smith, a spokesman for CareFirst Watch, a Washington coalition of consumer and other nonprofit groups monitoring the deal, agreed: "I believe, given what the Assembly did [Monday night], they didn't kill the deal."

CareFirst officials declined to discuss the status of the deal yesterday, but issued a written statement saying, "We remain confident that we can demonstrate the benefits this transaction can have for our members and the communities we serve."

The two bills go to Gov. Parris N. Glendening, who has expressed support for legislation that would make it more difficult for CareFirst to convert to a for-profit company.

Beside the all-cash requirement, the legislation prevents CareFirst from paying bonuses to executives based on the sale. William L. Jews, chief executive officer, was slated to receive $9.1 million, and other executives a total of $24 million.

The legislation also makes it incumbent on CareFirst to prove the deal is in the best interest of the state. The legal burden now rests with insurance commissioner.

The legislation allows lawmakers 90 days to review the deal after the insurance commissioner rules on it. Insurance Commissioner Steven B. Larsen is reviewing the deal to determine if it is in the public interest.

Even if it doesn't block the CareFirst-WellPoint deal, the legislation could have an impact on it.

If WellPoint proceeds with the acquisition, said Ferber, the insurer will have to negotiate an amended sales contract with CareFirst, and the revised deal would have to be approved by both boards of directors.

WellPoint could look for contract language offering protection in case its stock price is down when it has to sell shares to come up with the cash, said David C. Colby, the company's chief financial officer.

Hewitt, the Legg Mason analyst, said WellPoint may even look to change the purchase price, since "cash is more expensive than stock."

Besides the final shape of a revised deal, there is uncertainty over whether legislative criticism of CareFirst will color the review process.

Regulators in the District of Columbia and Delaware, where CareFirst also operates, also will review the deal.

Calvin Pierson, president of the Maryland Hospital Association, which has criticized the conversion and sale, said, "I think the legislature has sent a strong message that they hate the deal."

Del. Michael E. Busch, who led the fight against the acquisition in the House of Delegates, concurred. "The message to Mr. Jews and the board is we don't believe the conversion to an out-of-state company based in California is in the best interests of the citizens of Maryland," Busch said.

Other key legislative critics, however, said the lawmakers weren't trying to send a message.

"You have 188 people - it's hard for 188 people to speak with one voice," said State Sen. Robert R. Neall, referring to the General Assembly.

"We've removed lots of the most offensive parts of the transaction," the senator said, leaving Larsen free to focus on large issues such as whether the conversion is in the public interest and the price is fair.

Taylor, the House speaker, said he did not see the legislation as sending a message.

Sun staff writer Michael Dresser contributed to this article.

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