WellPoint, Health Systems Expected to Announce Deal : Mergers: Analysts and others give Blue Shield's rival $4.5-billion offer for WellPoint little chance.

TIMES STAFF WRITER

As Blue Shield of California tried to play a spoiler role, WellPoint Health Networks and Health Systems International were within two days of announcing a merger agreement that would create the nation's largest publicly held health maintenance organization, people close to the discussions said Monday.

Blue Shield over the weekend made a cash-and-stock offer for WellPoint that it valued at $45 a share, or $4.5 billion, according to a source close to the negotiations. Blue Shield had made an initial bid of $40 a share, but it sweetened its offer as WellPoint and Health Systems appeared to move closer to a deal in recent days.

Analysts and others said Monday that they saw little chance that Blue Shield's offer would sway WellPoint--which is 80% owned by Blue Cross of California--from going forward with its acquisition of Health Systems, the Woodland Hills-based parent of the Health Net health maintenance organization. The deal would create a managed-care company with more than $5 billion in revenue and more than 4 million members.

Although merger talks between WellPoint and Health Systems have been reported previously, the two companies officially confirmed the discussions in a joint statement Monday. The statement, which made no mention of Blue Shield, said a WellPoint-Health Systems combination offers "distinct advantages . . . for long-term stockholder value, strategic fit, operational synergies and probability of closing."

If there are no last-minute complications, WellPoint and Health Systems are expected to announce a deal by Wednesday, people familiar with the talks said.

WellPoint stock soared $2.75 a share to finish at $33.75 on Monday on the New York Stock Exchange. Health Systems jumped $1.375 to end at $32.375 on the NYSE.

The proposed merger, involving a stock swap and $1.2 billion in cash, would be one of the biggest takeovers yet in the rapidly consolidating managed-care industry. It could also dramatically reshape the California health care market by creating a powerful rival to Oakland-based Kaiser Permanente, a nonprofit HMO with 6.6 million members nationwide.

Under the plan, Health Systems' stockholders would receive 1.09 shares of WellPoint common stock for each Health Systems share. In addition, WellPoint stockholders would get about $1.2 billion cash in connection with a related WellPoint financial reorganization.

The deal could be complicated by California regulators, who are considering a controversial proposal by Blue Cross to create a new health care charitable foundation. In 1993, Blue Cross spun off most of its managed-care operations into a for-profit publicly traded company, WellPoint. Now the California Department of Corporations, which regulates HMOs, is requiring Blue Cross to compensate the public--through creation of a charitable foundation--for the tax-exempt status Blue Cross enjoyed as it built its managed-care operations.

The WellPoint-Health Systems deal would fund the new charity with approximately $1.2 billion in cash, and the charity would own 45% in the new WellPoint-Health Systems entity, according to an individual familiar with the talks.

California Corporations Commissioner Gary Mendoza said Bear, Stearns & Co., the New York investment bank the state hired to review any financial proposals involving WellPoint or Blue Cross, "has not given us a conclusive opinion about any particular proposal under discussion."

Malik M. Hasan, Health Systems' co-chairman, would become the new chairman of the Health Systems-WellPoint entity, and Leonard Schaeffer, chief executive of Blue Cross and WellPoint, would become chief executive, people close to the talks said. Roger F. Greaves, co-chairman of Health Systems, would probably become vice chairman or a consultant to the company, they said.

Sources said the deal gives Greaves a lesser management role in the company than he had wanted and that he would probably leave the company after the deal is completed.

In a cumbersome arrangement, Greaves and Hasan have shared the titles of co-chairman, co-chief executive and co-president of Health Systems, the company formed through the January, 1994, merger of Greaves' Health Net and QualMed, a Colorado-based HMO founded by Hasan. The two executives, who have dissimilar management styles, have been known to clash over management issues.

According to people familiar with the negotiations, WellPoint received a proposal of between $35 and $40 a share from the leveraged buyout firm Kohlberg, Kravis Roberts & Co. But WellPoint and Blue Cross considered that offer "a little light on value," one person close to the talks said.

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Blue Shield, a nonprofit insurer with a reputation for being a laggard in the hotly competitive managed-care market in California, is considered a surprise bidder for WellPoint. In recent years, under the leadership of former Kaiser Permanente Chief Operating Officer Wayne Moon, Blue Shield has sought to aggressively build its HMO membership. Although its overall membership has declined to about 1.6 million, its HMO business has more than doubled in two years to about 280,000 members statewide.

Nearly two years ago, Blue Shield was thwarted in its bid to become a major player in California when its proposed $6.5-billion merger with nonprofit UniHealth America fell through.

As part of its bid for WellPoint, Blue Shield has proposed converting the new managed-care company into a for-profit, investor-owned business--a move that would have required state regulatory approval, according to a source familiar with the Blue Shield proposal.

The Blue Shield-WellPoint proposal also gives no management role to WellPoint CEO Schaeffer.

A source close to WellPoint and Blue Cross said there were concerns about the adequacy of Blue Shield's financing for its $45-a-share offer. Blue Shield would have financed it with $1 billion in cash, mostly on WellPoint's books, $1.7 billion in bank debt, $1.5 billion in equity in the new company and $300 million in equity from an undisclosed investor, the source said.

Blue Shield "did not have a single dollar of committed financing," the source said.

But another source familiar with the Blue Shield proposal contended that a financing commitment could have been easily arranged and would have been "a no-brainer."

This source contended that WellPoint favored the Health Systems deal partly because it guaranteed a key management job to Schaeffer. "Blue Shield offers the best synergies (with WellPoint) . . . but Leonard Schaeffer doesn't come out on top in that deal," he said.

Blue Shield's Moon would be CEO under the San Francisco-based insurer's proposal.

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