Qual-Med Says It Has a Deal to Buy 73% of Health Net Stock : Health care: The contention is made in a lawsuit. A foundation formed by the Woodland Hills-based HMO denies that the $400-million contract exists.
Qual-Med Inc., stepping up its attack for control of Health Net, California’s second-largest HMO, contended Monday that it has a deal to buy 73% of Health Net’s stock for about $400 million, but that the seller is trying to renege on the alleged agreement.
In a lawsuit filed in Superior Court in Los Angeles, Qual-Med, an HMO operator based in Colorado, asserts that it has “an enforceable contract” to buy the 73% stake now held by the California Wellness Foundation, a charitable foundation formed in February when Health Net converted from a nonprofit to a for-profit entity.
The foundation now denies any such contract exists, but the foundation did negotiate the deal, said Lyle S. Gritchen, Qual-Med’s general counsel. If so, it signals that the foundation is willing to peddle its Health Net stock only six months after it acquired the shares.
That would seem at odds with the restrictions attached to Health Net’s conversion when the plan was approved by state Department of Corporations Commissioner Thomas Sayles. Among other things, Sayles said the foundation had the right to sell up to only 20% of its Health Net stock over the next three years.
Sayles was unavailable for comment, but Qual-Med noted that its bid is conditioned on his approval.
Roger F. Greaves, Health Net’s chairman, is also the only Health Net executive on the California Wellness Foundation’s eight-member board. He issued a statement blasting Qual-Med’s suit, saying, “Health Net is not for sale, not to Qual-Med, not to anyone.
“We will not be moved by Qual-Med’s bullying tactics, fallacious allegations and outrageous litigation,” Greaves said. He, too, cited Sayles’ restrictions on selling the stock and noted that Qual-Med, as a publicly held concern, had not reported any binding contract to the Securities and Exchange Commission.
John K. Van de Kamp, a lawyer representing the foundation and a former California attorney general, said he could not confirm nor deny that the foundation had negotiated a deal with Qual-Med. But he said “no enforceable contract exists.”
Health Net’s conversion to for-profit status capped a yearlong struggle among several groups, including Qual-Med, trying to buy control of the Woodland Hills-based HMO.
The battle included charges by consumer groups and some of the bidders that the price at which Greaves’ group tried to convert Health Net was too low, thus shortchanging the public. When an HMO converts to for-profit status, it must donate an amount equal to its “fair market value” to a public foundation. (Health Net’s revenue last year totaled $1.1 billion.)
In the end, Sayles approved a conversion plan whereby Health Net agreed to fund its foundation with an immediate $75 million, an additional $225 million plus interest over 15 years and to provide the foundation with an 80% non-voting stake in Health Net. The foundation’s shares, however, become voting stock if they’re sold.
Sayles’ plan also allowed Health Net’s management to buy the remaining 20% stake--with 100% voting rights--for $1.5 million. (The stakes have since changed to 73% for the foundation and 27% for management because additional shares were issued after the conversion.)
Qual-Med contends that it has a deal to buy the foundation’s stake in Health Net for $340 million in cash. It also would issue the foundation preferred stock with a face value of $60 million.
Qual-Med obviously is hoping that the California Wellness Foundation will find it more appealing to get that sum immediately, rather than waiting for the rest of its funding from Health Net over the next 15 years.
The foundation plans to use its cash for various health-promotion and disease-prevention programs in the state, including grants aimed at infant, adolescent and work-related health care projects.
Qual-Med said it also offered Thursday to buy the 20% stake in Health Net owned by the HMO’s management. In that offer, Qual-Med said it would pay $21 million in cash and issue the executives preferred stock with a $50 million face value.
Health Net’s management has yet to respond to that bid, Qual-Med said. Qual-Med also has been challenging Health Net’s conversion in an effort to clear the way for its own bid. The Colorado company has a separate suit pending in Superior Court in Sacramento aimed at disallowing the conversion.
Qual-Med operates HMOs in Colorado, California, Idaho, New Mexico, Oregon and Washington. With 311,000 members, it is much smaller than Health Net, with 875,000 members. Health Net is second in size only to Kaiser Permanente among California’s HMOs.
