Maxicare Buys 12% Stake in HealthCare
Maxicare Health Plans Inc., the nation’s largest investor-owned health maintenance organization, said Tuesday that it has bought nearly 12% of an Orange County HMO and is negotiating to buy the rest.
HealthCare USA, the Orange County HMO, declined to comment on the purchase of 11.9% of its stock by Maxicare that was disclosed in statements filed with the Securities and Exchange Commission.
The filing confirmed industry speculation of a pending deal between the two HMO firms. The announcement comes at a time when Maxicare is in the midst of a drive to expand.
Harlan Loomas, HealthCare’s chairman, was notified of the development on Friday, when Fred Wasserman, Maxicare’s chairman, telephoned to say that his company planned to file the required 13-D disclosure statements with the SEC.
“We just received our copy of the 13-D,” said HealthCare spokeswoman Sheila Kinnane. “Until Harlan can review it, I don’t think he’ll have any comment.” The purchases make Maxicare the single largest outside shareholder, she said.
Negotiations between the two companies have been taking place intermittently since early last year, said Samuel Westover, Maxicare’s chief financial officer.
In all, according to SEC documents filed by Los Angeles-based Maxicare, at least five separate meetings have taken place between officials of the two HMOs to discuss an acquisition, including meetings between Wasserman and Loomas.
On Feb. 8, Westover said, Maxicare offered $11 a share for HealthCare, which in turn made a counterproposal to Maxicare. Westover declined to say how much HealthCare asked in return.
Network of Local Offices
“I would think $15 a share would be reasonable,” said Steven Reid, health-care analyst for the Los Angeles investment firm of Wedbush, Noble, Cooke. He added that HealthCare “would be a great acquisition for Maxicare.”
Indeed, what Maxicare finds most appealing about HealthCare is its network of local medical offices and the large membership base in its California and Michigan HMO subsidiaries, which total about 250,000 people.
“Maxicare does not have a Detroit operation at this time, so that would fit nicely into our expansion plans,” Westover said. “Additionally, in Southern California they provide more services to more members in some areas than we do, particularly in Orange County, Riverside and San Diego, so they would fill out our plan nicely.”
However, Larry Selwitz, an analyst with Bateman Eichler, Hill Richards, a Los Angeles brokerage house, said HealthCare’s heavy debt could make its acquisition expensive for Maxicare. HealthCare, he said, has $76.1 million in long-term debt against $28.5 million in shareholders’ equity as of March 31.
“I think there are better operations out there, and I’m surprised at this because Wasserman has been saying that it’s easier to start a new HMO,” Selwitz said. “Whatever they spend is going to be goodwill,” an intangible asset.
According to Maxicare’s SEC filing, the giant HMO acquired its stake in 35 separate transactions, with purchases ranging in prices from a low of $7.62 1/2 a share to as high a $10 a share.
Maxicare wants to complete this acquisition “the sooner the better,” Westover said. However, the company has no plans to initiate a hostile takeover should HealthCare become a reluctant bride, he said.
“We’re in friendly discussions right now. A tender offer would be an unfriendly action,” he said. “We don’t have any intention of attempting an unfriendly takeover.”
Any hostile takeover attempt would be complicated by a “poison pill” provision adopted by HealthCare, which would essentially require anyone attempting to acquire control of HealthCare without the approval of its directors to pay $40 a share for the company. Those anti-takeover provisions, which expire at the end of 1986, would be “a serious impediment” to a hostile takeover, Westover admitted.
Maxicare had first-quarter net earnings of $8.2 million, up 121% from $3.7 million a year earlier. Revenue for the first-quarter rose 56% to $173.9 million from $111.4 million in 1985. Maxicare currently has more than 800,000 members in 13 states, including California.
HealthCare turned a first-quarter profit of $980,000, compared to a net loss of $3.5 million a year earlier. Revenue from continuing operations during the first quarter rose 26% to $52.9 million from $41.9 million.
Between its Orange-based General Med and Southfield, Ill.-based Independence Health Plan subsidiaries, HealthCare serves 250,000 subscribers.
Tuesday’s announcement confirmed speculation among industry observers that a possible takeover of HealthCare is in the works.
Following the news Tuesday, HealthCare common shares went up on the New York Stock Exchange to peak at $12.50 a share before slipping to a closing price of $11.87 1/2 a share, up $1.87 1/2 for the day. More than 361,000 shares changed hands.
Maxicare, which is traded over the counter, lost 25 cents Tuesday to close at $27.25 a share.
