State Says It Can’t Help Bidders in HMO Takeover

With Health Net turning a deaf ear to their takeover offers, some of the four outside bidders trying to acquire the big HMO are complaining to the Department of Corporations that their offers aren’t being given a fair shake by Health Net’s directors.

But the state agency says their whining won’t make any difference. The Department of Corporations says it simply is not allowed under state law to force Woodland Hills-based Health Net--which is currently a nonprofit entity that doesn’t have stockholders--to give closer consideration to the outside bids.

Rather, the suitors must negotiate first with Health Net’s board before taking a proposal to the agency for approval, said Richard Murakami, the department’s assistant commissioner for health-care services.

“We don’t have the authority,” he said. “We have no say in telling the Health Net board which offers they should or should not accept or review.”

But the suitors are griping that Health Net’s board has a conflict of interest. Health Net’s board favors a $108-million buyout proposal from its own management, less than half the $225 million that one of the outside bidders, Humana Inc., has offered. Furthermore, nine of Health Net’s 13 directors are on the HMO’s buyout team. The same directors have so far refused to negotiate with any of the outside bidders, even though most of their offers are significantly higher than management’s proposal.

That doesn’t mean the outside suitors are giving up. Pacific Mutual Life Insurance Co. in Newport Beach, which has offered $135 million for Health Net, continues to insist that the Department of Corporations is not following its own guidelines for evaluating such offers.

Pacific Mutual also hasn’t ruled out taking the matter to court, although “it’s not our preferred course of action at this point,” said spokesman Robert Haskell.

Spokesmen for two other bidders, Blue Cross of California and Humana Inc., declined to say what their companies plan to do next.

The bidding war for Health Net, the state’s second-largest health maintenance organization, was triggered in late May when it was disclosed that Health Net’s management had proposed to acquire the HMO at the same time Health Net converts from nonprofit to for-profit status.

State law requires that Health Net, to make the conversion, contribute an amount equal to its “fair market value” to a charitable foundation, and Health Net proposed paying $108 million. Of that, $15 million would be paid upfront; the rest would be paid over 15 years, nearly all of it from cash generated from Health Net’s operations.

In a separate transaction, 32 members of Health Net’s management--through a separate holding company named HN Management Holdings Inc. headed by Health Net President Roger F. Greaves--would purchase Health Net for $1.5 million. Should Health Net later sell stock to the public or be purchased, the executives could reap many times that amount.

Three of the outside bidders--Humana, a large hospital operator based in Louisville, Ky.; Shamrock Investments, a Los Angeles investor group, and Pacific Mutual--then weighed in with higher buyout offers. Blue Cross has proposed a straight merger that wouldn’t involve an exchange of cash.

Health Net’s directors rejected outright the Shamrock and Pacific Mutual bids, and last week they issued a statement that all but rebuffed the Humana and Blue Cross deals as well, although Health Net says no decision has been made.

In the meantime, Humana and Pacific Mutual have complained to the Department of Corporations that an independent review of the bids is necessary, because the majority of Health Net’s directors are on the management buyout team.

In their letter to the department, Humana’s lawyers asserted that the department “has an obligation to independently consider the Humana offer” and that the plan by Health Net’s management--in view of their dominance on the Health Net board--contains “self-dealing aspects” that must be reviewed.