Blue Shield Raises Its Bid for WellPoint : Health care: The $4.8-billion offer leads target to delay merger deal with Health Systems International.


Blue Shield of California, hoping to scuttle a blockbuster merger between two California health care giants, has sweetened its offer to buy WellPoint Health Networks by $3 a share, to about $4.8 billion, sources close to the talks said Wednesday.

Blue Shield's new $48-a-share all-cash offer--a 38% premium over WellPoint's closing price Wednesday of $34.875 a share--poses an unwelcome obstacle to WellPoint's efforts to acquire rival Health Systems International for $1.8 billion in stock.

The new Blue Shield offer has forced WellPoint--and its 80% owner, Blue Cross of California--to delay completion of the deal while advisers evaluate the new Blue Shield bid, sources said.

Woodland Hills-based WellPoint earlier rejected two Blue Shield proposals, a $40-a-share offer made about two weeks ago and a $45-a-share proposal made Friday. WellPoint's financial advisers are skeptical of Blue Shield's ability to fully finance its proposal and have placed a lower value on the proposal than has Blue Shield, sources said.

"What we have here is a pretty fluid situation," said one person close to the discussions.

Officials at WellPoint, Blue Cross and Blue Shield declined to comment.

Blue Shield's new bid was made late Tuesday evening, as officials of WellPoint were preparing to announce final agreement on the Health Systems takeover--a deal that would create the nation's largest publicly held health maintenance organization.

WellPoint's advisers downgraded the value of Blue Shield's earlier bids in part because it plans to use $800 million of WellPoint's own cash to finance the deal, sources said. Blue Shield is doing the same in its sweetened bid, sources said. Also, Blue Shield's bid doesn't leave a role in the merged company for WellPoint and Blue Cross Chairman Leonard Schaeffer--a key reason for WellPoint's resistance to the bid, sources said.

By boosting its bid, Blue Shield hopes to pressure WellPoint and Blue Cross to put off their agreement with Health Systems and take another look at its offer. Blue Cross and Blue Shield are unrelated companies.

Blue Shield officials are frustrated because they believe that WellPoint and Blue Cross have not seriously considered its offers because they favored the Health Systems deal all along, a source close to Blue Shield said.

"They have precluded us from participating in this process the whole way," the Blue Shield source said. The source said WellPoint has turned down Blue Shield's requests for certain non-public information it needs to put together its proposal.

"It's like you're trying to sell your house, and you take one party through the whole house and show them everything, and you give the other party a flier to look at," the source said. "But they have to evaluate this offer; they just can't disregard it."

Ed Keaney, an analyst with Volpe, Welty & Co. in San Francisco, said WellPoint may be swayed by the market strength they see in a merger with Health Systems, the Woodland Hills-based parent of Health Net, California's second-largest HMO.

WellPoint and Health Systems have enjoyed fast membership growth and are highly profitable companies with a strong track record in managed care, Keaney noted. Blue Shield, in contrast, is a latecomer to the California HMO business and derives most of its revenue from indemnity-type health programs in which enrollment has been dropping. Blue Shield reported earnings of $5.8 million on revenue of $1.9 billion in 1993, the latest year for which figures were available.

"Longer-term, WellPoint looks at Health Systems and sees a much stronger combination with a very successful company that is 100% managed care," Keaney said.

In New York Stock Exchange trading Wednesday, WellPoint shares rose 50 cents to $34.875, while Health Systems fell 50 cents to $33.25.

Under the WellPoint-Health Systems proposal, each Health Systems shareholder would receive 1.09 shares of WellPoint common. Also, WellPoint stockholders would receive $1.2 billion in cash, of which 80% would go to Blue Cross to be used to start a new charitable foundation.

Another significant issue in the WellPoint-Health Systems deal is whether the payment to the charity would be taxable under Internal Revenue Service regulations.

Health Systems spokesman Don Prial said the company believes that all financial issues could be resolved "shortly."

A potential obstacle in the Blue Shield offer could be delays in winning state regulatory approval. Under its proposal, Blue Shield would convert from a nonprofit to an investor-owned company, which would allow it to distribute earnings to shareholders instead of entirely plowing them back into the company. Such a conversion would require the approval of the California Department of Corporations, which regulates HMOs.

Similar conversions have sparked strong protests from consumer advocates and legislators because of a state law that requires nonprofit companies switching to stockholder-ownership to compensate the public for prior tax benefits. Health Systems' predecessor company encountered opposition from consumer advocates when it converted to for-profit status from nonprofit. And Blue Cross has been the target of similar criticism resulting from its 1993 spinoff of most of its managed care operations into for-profit WellPoint.

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