FHP Seeks to Acquire Rival HMO Takecare : Health: The $829-million merger would form the second largest coverage group in California.

Continuing a wave of health care mergers that have reshaped the industry in recent years, FHP International Corp. said it has agreed to acquire a competing health maintenance organization in Northern California for $829 million.

FHP’s proposed acquisition of Takecare Inc., based in Concord in Contra Costa County, is the biggest takeover of a managed-care company to date and would create the second-largest HMO in California and about the fifth largest in the nation.

Strategically, the acquisition would allow FHP, which has 851,000 members, to expand its Medicare market into Northern California and Colorado, where it has been struggling to establish itself. Takecare, which has 742,000 members, is already strong in both regions.

But there may be a competing bid in the wings. Pittsburgh’s wealthy Hillman family, which controls 16% of Takecare’s 13 million outstanding shares, will oppose the FHP deal because “there’s another offer available to Takecare that would offer greater value to shareholders,” said Lawrence M. Wagner, president of Hillman Co.

Wagner would not comment further, and executives of Takecare or FHP would not disclose the identity of the potential suitor.

Ed Keaney, an analyst with the brokerage firm Stifel Nicolaus in St. Louis, said a second offer could derail the FHP bid. “This really is a long way from a done deal,” Keaney said. “There is the risk that the deal will not be completed.”

Company officials said the deal has strong support among other shareholders, however, and they expect it to be finalized by the end of June. The transaction would also require regulatory approvals.

The deal comes amid a frenzy of health care mergers in recent months, fueled in part by the expectation that national health care reform will favor larger health care companies that offer a range of services and cover broader geographic areas.

Separately on Monday, Nashville-based Healthtrust Inc. said it will buy Dallas-based EPIC Holdings Inc. in a deal valued at $1 billion. Upon completion of the acquisition, Healthtrust said it will operate 115 acute care hospitals in 22 states.

In California, the largest health care merger proposal was the planned union of Blue Shield of California and Unihealth America. But that deal, which would have created the second-largest HMO in California behind Kaiser Permanente, unraveled two months ago over differences in “corporate culture.”

Some analysts said the FHP-Takecare deal is not comparable to the defunct Blue Shield-Unihealth proposal, and predicted smooth sailing for FHP, which would pay $62 a share for the smaller firm.

In over-the-counter trading Monday, Takecare’s stock shot up $6.50 a share to close at $58.25. FHP’s stock, also traded on the Nasdaq market, closed at $26.50 a share, unchanged.

“This is a very good deal for both parties,” said Jack Massimino, an FHP executive vice president. “It is a great strategic fit for both organizations, and we are very excited about it.”

Analysts also lauded the tentative agreement--which caught them by surprise--saying each side would complement the other by creating a new, powerful company that would be a formidable competitor.

FHP is already the nation’s largest provider of managed-care services to Medicare patients. Under its Senior Plan, about 300,000 Medicare patients receive comprehensive medical benefits. FHP officials would like to increase that number in the competitive, highly profitable Medicare market.

But FHP needs to boost its regular membership first, analysts noted, especially in Northern California and Colorado, where the company now has only a small presence. Federal law requires that for each Medicare member that an HMO signs up in a region, it must also sign up a regular member.

Takecare President R. Judd Jessup said that his company’s large number of regular members in the Bay Area and Colorado mean that the merged entity would be able to add new Medicare recipients quickly.

“We think it will be great going forward together,” Jessup said.

The new company would have about 1.6 million members in California, Colorado, Utah, Arizona, Illinois, Ohio, Guam, New Mexico and Nevada, and would have a combined annual revenue of $3.5 billion, company officials estimated.