THE HEALTH CARE INDUSTRY : FHP Will Acquire Rival TakeCare in HMO Industry's Largest Merger : Takeovers: The $1.1-billion deal would create another major player in California managed care.

By JAMES M. GOMEZ and DAVID R. OLMOS

March 5, 1994 12 AM PT

TIMES STAFF WRITERS

FOUNTAIN VALLEY —

FHP International Corp. agreed Friday to acquire a competing Northern California health maintenance organization in a deal that would create a giant statewide HMO that could provide more convenient service for large California employers and workers.

The merger, the largest ever in a burgeoning managed care industry that has seen a slew of consolidations, calls for Fountain Valley-based FHP to acquire Concord-based TakeCare Inc. in a sweetened cash and stock deal valued at nearly $1.1 billion. FHP’s earlier $829-million offer in January had been spurned by TakeCare, triggering a bidding war.

Analysts said the merger would add to the already considerable power that HMOs have in the California health care market.

The new company, which would be the nation’s fifth-largest HMO, could prove especially attractive to large employers with workers throughout the state. Many companies prefer to deal with one organization that can offer them “one-stop shopping” for medical care, analysts said.

“It makes them a legitimate statewide player in all major California markets,” said Peter Boland, a health care consultant in Berkeley.

As such, it would compete strongly with Kaiser Permanente, Blue Cross and Health Systems International, the managed care company formed by the recent merger of Pueblo, Colo.-based QualMed Inc. and the parent firm of Health Net, based in Woodland Hills.

“It sends a pretty clear message that (managed care companies) will have to have statewide reach, or if you’re not statewide, you will need dominant market share in a particular market,” Boland said.

Edward J. Susank, principal at William M. Mercer, a health care consulting firm, said the deal would add to the pressure on California physicians and hospitals to cut the prices they charge HMOs for their services.

The deal gives FHP-TakeCare “a tremendous amount of marketing clout to negotiate (lower) prices” with physicians and hospitals, Susank said.

If those physicians and hospitals refuse to cut prices, they face the risk of being dumped by the HMO and thus losing thousands of patients, he said.

It is not clear, however, whether FHP-TakeCare would pass along any lower costs to consumers in the form of lower premiums. For-profit, publicly held HMOs such as FHP and TakeCare have faced pressure from investors to increase profits.

HMO mergers can also reduce the choice among health plans available to employers and workers.

Hospitals and physicians, who often complain about the growing influence of managed care companies over patient care, are already forming their own large groups to counter moves by HMOs.

Also, the future of some smaller HMOs could be threatened by the emergence of very powerful competitors such as FHP-TakeCare.

The merger would double FHP’s membership to 1.6 million in eight states and the U.S. territory of Guam, creating a company with combined $3.25 billion in annual revenue.

“It is going to be a wonderful combination,” said Wescott (Bill) Price III, FHP’s chief executive. “Of all the mergers I’ve seen (in the HMO industry), I’ve never seen one that makes more sense.”

There were no immediate plans to drop TakeCare’s name or issue layoff notices as the two firms combine operations, company officials said.

Under the definitive agreement, FHP agreed to pay $80 a share--up from its original offer of $62.50 a share made Jan. 10.

The boards of both companies held numerous meetings over the past several days to work out final details before reaching an accord Thursday night, company officials said.

The deal, which requires regulatory approval, is expected to be completed in July. Neither side expects any challenges to the deal.

Though about $270 million higher than FHP’s initial offer, the structure of the deal is the same: TakeCare shareholders would receive 50% in FHP preferred stock, 35% in cash and 15% in FHP common stock, with the FHP common retaining a constant value of $28 per share.

Of the $385 million to be paid in cash, about $288 million would be raised through a bank loan from Chemical Bank of New York, Price said.

Financial analysts said the debt load would not hurt the company in the long run. And Standard & Poor’s Corp. and Moody’s Investors Services said they are maintaining their credit ratings for FHP, despite the deal’s expected drag on future earnings.

“Completion of the merger . . . will strengthen FHP’s position as a health maintenance organization without overly extending its capital structure,” S&P; said in a prepared statement.

But some health care analysts said that in the short run, FHP would suffer financially partly because of the steep price tag.

Mary O’Connell, analyst with San Francisco brokerage of Louis Nicoud Associates, said the price is at “the high end” of what she thought TakeCare might fetch.

The announcement of the deal sent TakeCare’s stock soaring. It closed at $75.25 a share on the Nasdaq market, up $7.875 a share. FHP stock, also traded on Nasdaq, fell $1.75 a share to close at $26.75 a share.

TakeCare President R. Judd Jessup confirmed Friday that “several other companies” had made offers to purchase TakeCare after the initial FHP bid, which was rejected after several TakeCare shareholders filed suit challenging the offer. Most of those subsequent offers were unsolicited, Jessup said.

One of the bidders was FHP’s chief competitor, PacifiCare Health Systems Inc. of Cypress. PacifiCare officials declined to comment on Friday’s announcement.

Merger General

FHP International Corp. agreed o buy TakeCare Inc. for about $1.1 billion in cash and FHP stock. The move is another sign of continuing consolidation in the health care industry and the growing role of health maintenance organizations.

CREATING A GIANT

The merger of FHP and TakeCare would create the nation’s fifth-largest managed health care firm. Managed care health firms, ranked by enrollment as of July, in millions:

Kaiser Foundation Health Plans: 6.59

Blue Cross and Blue Shield System: 6.18

U.S. Healthcare: 1.47

Prudential Health Care Plans: 1.43

FHP/TakeCare: 1.33

Cigna Healthcare Plan: 1.18

United Healthcare Corp.: 1.15

Health Insurance Plan of Greater New York: 1.13

Aetna Health Plans: 1.05

Humana: 1.05

THE COMPANIES AT A GLANCE

FHP International Corp.