PacifiCare Makes Surprise Offer to Buy Maxicare

In a move to boost its already large membership in Southern California, PacifiCare Health Systems Inc., a Cypress-based health maintenance organization, said Thursday that it will make a bid to acquire bankrupt Maxicare Health Plans.

Details of the proposed acquisition were not disclosed. The offer comes five days before Maxicare was to present a disclosure statement to the federal bankruptcy court in Santa Ana. The statement’s approval is a crucial step for reorganization and emergence from bankruptcy.

Officials of Los Angeles-based Maxicare expressed surprise at the offer, which they said was unsolicited.

“We have made it clear for more than a year that Maxicare is not for sale so we are, quite frankly, puzzled by the timing of this announcement, which comes just two business days before a crucial public hearing on our reorganization efforts,” Peter J. Ratican, chairman and chief executive of Maxicare, said in a prepared statement.

Wayne Lowell, PacifiCare’s chief financial officer, said the company had informed Ratican of the forthcoming buyout proposal, which was to be presented this morning. He said the offer was expected to be a starting point for extended negotiations.

“We believe Maxicare would make an excellent strategic addition for PacifiCare,” Terry Hartshorn, PacifiCare’s president and chief executive, said in a statement. “Maxicare’s largest single membership component is in California, which also represents our largest geographic concentration of membership.”

PacifiCare officials said 130,000 of Maxicare’s 320,000 members are in California, where about 450,000 of PacifiCare’s 638,000 members also are located. The acquisition would boost PacifiCare’s total membership by more than 50%.

Ratican said in an interview that he expects Maxicare to emerge from bankruptcy later this year. While he has an obligation to creditors, stockholders and clients to consider any offer, Ratican said he still expects Maxicare “to be an aggressive competitor of theirs (PacifiCare) in the 1990s.”

PacifiCare’s interest in Maxicare, he said, “is an indication that they think this management has turned the company around.”

Ratican said he had previous discussions with PacifiCare about the possible sale of a few Maxicare operations. But those discussions, which ended in March, 1989, were unsuccessful.

While no financial details were released, Ratican noted that Cigna, a diversified insurance company based in Philadelphia, recently announced it would pay $777 million to buy Nashville-based Equicor, which has 450,000 members in 19 HMO plans.

Alan Hoops, PacifiCare’s chief operating officer, would say only that PacifiCare would expect to offer Maxicare’s creditors as much as they have been promised in Maxicare’s plan of reorganization.

That plan calls for creditors and shareholders to receive about $102 million in cash, $67 million in notes and common stock and warrants.

PacifiCare’s bold bid surprised some industry analysts who noted PacifiCare has a conservative reputation for consistent profitability and for building membership and profits from internal growth.

“PacifiCare is a very consistent player that usually hits singles and doubles. Although they have very good and capable management, they usually don’t go for home runs,” said Larry Selwitz, health-care analyst for Cruttenden & Co., an investment banking firm in Newport Beach.

Unlike many other HMOs--including Maxicare--that experienced losses during an industry depression several years ago, PacifiCare has shown consistent profits since it went public in 1985, in part because it has done well investing its surplus cash.

In its last fiscal year, ended Sept. 30, PacifiCare posted revenue of $650 million, up 52% from revenue of $428 million from fiscal 1988 and earnings of $10.9 million, up 71% from the previous year. The company’s strong growth has continued into 1990, with first-quarter earnings hitting $2.9 million, up from $1.1 million for the same quarter in fiscal 1989.

Maxicare, by contrast, in the first nine months of 1989 showed a net loss of $22.3 million. However, company officials say they have managed to increase the company’s cash flow by trimming overhead and that they expect Maxicare to become profitable in 1990.

Both Maxicare and PacifiCare operate similarly in that they contract for independent physicians and hospitals to provide service to their members, unlike other HMOs that own hospitals and clinics and hire their own medical staffs.