Offering Puts FHP Corp.’s Value at Six Times Its Purchase Price
FHP Corp., a health maintenance organization that came under bitter attack last year when it became a for-profit corporation, is planning a public stock offering that would value the company at as much as $225 million--or about six times the price that its new owners paid seven months ago.
The company, based in Fountain Valley, converted from its nonprofit status last November, and a management group bought it for $38.6 million. Critics, including the California attorney general’s office and Consumers Union, charged that the switch was unfair and a “gross abuse” of duty by FHP management in buying the firm at a “bargain basement price.”
Now, in documents filed with the Securities and Exchange Commission, FHP said it plans to sell 3 million shares of stock for between $15 and $18 a share. After the offering, insiders will continue to hold 9.5 million shares, or 76.1%, of FHP.
Based on the proposed offering price, FHP’s total market value would be between $188.1 million and $225.7 million. The 76.1% stake to be held by insiders--including Dr. Robert Gumbiner, FHP’s founder and chairman--would have a market value of from $143.1 million to $171.1 million.
FHP officials declined to comment on the pending offering.
FHP’s change in status was the state’s most expensive and controversial conversion of a nonprofit HMO in California.
Under state law, managers of a nonprofit HMO can convert it to for-profit status
after donating a sum equal to the company’s net worth to charity--often a charitable trust established by the managers themselves.
After prolonged negotiations with the California Department of Corporations, FHP’s management agreed to donate about $38.6 million to the FHP Foundation. However, Maxicare Health Plans stepped in with an offer to buy FHP for $50 million and filed a lawsuit to block the conversion.
In a recent telephone interview, Fred Wasserman, Maxicare’s chairman, said his company would have paid “substantially higher,” for FHP had it been allowed to buy the company.
Stymied in Court
“We didn’t think the company was valued correctly at the time,” he added. “If you’re going to convert a company like this, don’t claim that you’re converting it at fair market value when it isn’t.”
Although the California attorney general’s office entered the fray on Maxicare’s behalf, the giant HMO’s attempt to purchase FHP was stymied when a Los Angeles Superior Court judge ruled that converting plans are not required to sell out to the highest bidder.
Contending that the difference between FHP’s conversion price and what a bidder such as Maxicare would have been willing to pay for FHP was lost to charity, the state attorney general’s office filed suit to recover unspecificed damages from FHP.
“Our action is still pending, and we will pursue our litigation to the end,” said James Schwartz, assistant attorney general. “We assumed that they would go public and get an amount of money that would accurately reflect the value of the company.”
Advocates of converting HMOs to for-profit corporations say one key reason for making the switch is that, as nonprofits, HMOs are limited in their ability to raise capital for growth and expansion.
However, critics of conversions, including Jim Schultz, a policy analyst with the San Francisco office of Consumers Union, argue that in too many cases, charity comes up short because state regulators allow the converting HMO’s managers to undervalue their companies.
And, he said, when conversion is followed by a public stock offering--such as with FHP--the issue becomes one of whether the managers planned the offering before conversion knowing that they would benefit from the value added to their stock.
“It’s to be expected that the company would go public,” Schultz said. “This raises the question of did they pay (a high enough price) for the company knowing they were going to take it public.”
According to SEC filings, FHP’s operating income increased 26% during the fiscal nine months ended March 31 to $10.7 million from $8.5 million a year earlier. Revenue during the nine-month period increased 48% to $189.4 million from $127.7 million.
