PacifiCare Offers to Buy Bankrupt Maxicare : Reorganization: The offer comes just days before a hearing on the HMO's Chapter 11 reorganization plan but appears lower than Maxicare's planned payment to creditors.


Maxicare Health Plan and its creditors said Friday that they will seriously consider the buyout offer by PacifiCare Health Systems Inc., but the proposal appears to be lower than what Maxicare is offering to pay creditors under its bankruptcy reorganization plan.

Neither company would disclose details of the all-cash bid, which came just three days before a federal bankruptcy court hearing on adoption of a disclosure statement crucial to Maxicare's reorganization and eventual emergence from Chapter 11.

"I know that the debtor (Maxicare) will seriously consider the proposal and so will we," said David Gill, a lawyer representing Maxicare's unsecured creditors.

However, Maxicare attorney Barry Burton and Bob Nelson, attorney for Maxicare's bank bondholders, said that "at first blush" the PacifiCare proposal seemed to be less in value than the mixture of cash, stock and notes the creditors are being offered under Maxicare's proposed plan of reorganization.

The reorganization proposal calls for creditors and shareholders to receive about $102 million in cash and 10-year notes with a face value of $67 million, as well as a combination of stock and warrants.

Burton acknowledged that the value of the stock and notes may be a matter of dispute and said the company's financial advisers will make a more thorough evaluation comparing the reorganization plan to the PacifiCare offer.

Burton said he sent a letter to Cypress-based PacifiCare late Friday to arrange a meeting with company officials early next week to determine the company's ability to finance the proposed buyout.

Before Maxicare would proceed with purchase negotiations, Burton added, PacifiCare also would be required to sign a confidentiality agreement that would enable the competing firms to share sensitive information without undermining their business.

Terry O. Hartshorn, the chief executive and president of PacifiCare, said the company has little debt and is flush with cash, including $17 million raised in a public offering last fall. He said the company will need to borrow very little to finance the deal. Moreover, he said that on Friday he heard from several creditors who were excited about the offer.

Analysts said that PacifiCare's offer may put Maxicare into play for a bidding war that could also include other HMOs that might want to quickly increase market share in the highly competitive Southern California market.

"In effect, they (PacifiCare) are trying to turn the reorganization plan into an auction," said Kenneth S. Abramowitz, health care analyst at Sanford Bernstein.

At least one other local HMO, HealthNet in Woodland Hills, indicated that it may also make an offer.

"I am not ruling it out," said Roger Greaves, chairman and chief executive of HealthNet.

HealthNet has 650,000 members in Southern California. Among HMOs in the region, it is second in size only to Kaiser Permanente, which has more than 2 million members in the Southland.

Greaves said he sent a letter to Maxicare about four months ago expressing interest in buying the company but never heard back.

Greaves said he admired Hartshorn for taking what he called "a bold and very positive move" in pursuing a buyout. He predicted that a merger of PacifiCare and Maxicare "would be good for the industry," which he said has lost public confidence because of the financial instability of companies like Maxicare.

"PacifiCare has a strong record of success and good service, and it (a takeover) would go far to erase some of the negative feelings that linger because of Maxicare's problems," he said.

Greaves added, however, that the management of Maxicare also has done "a terrific job under difficult circumstances" in putting Maxicare back on its feet since the company filed for Chapter 11 protection from creditors in March of 1989. The improvement in customer service, he said, has slowed the loss of members.

Since running into financial difficulties, Maxicare has lost more than half of its membership. Much of the benefit went to other HMOs. PacifiCare got the largest number of Maxicare defectors, gaining about 70,000 new members from Maxicare's troubles.

Maxicare officials said Friday they consider the PacifiCare proposal to be a form of flattery.


The proposed merger of PaficiCare and Maxicare would make it the third largest health maintenance organization serving Southern California.

MEMBERSHIP Southern HMO California Systemwide Kaiser 2,100 6,200 Healthnet 650 750 Cigna 500 1,500 PacifiCare 450 636 Maxicare 120 320 FHP 260 520

Source: The companies

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