Charge Erases Profit at United HealthCare
United HealthCare Corp. surprised investors on Thursday with a $900-million pretax charge in the second quarter, resulting in a loss for the second-largest U.S. health insurer and jeopardizing its plan to buy Humana Inc.
United HealthCare’s shares plunged 28%, falling $15 to close at $37.88 on the New York Stock Exchange, while Humana fell $6.63 to $19.13. United had put a $31.25 value on Humana’s shares in its bid for the company in May.
Shares of the two companies had fallen in recent weeks as increasing medical costs squeezed profits at health insurers.
On Thursday, United said the problems are forcing it to cut back its Medicare plans and quit some commercial markets.
The extent of the weakness came as a surprise because analysts had viewed United as one of the most successful health-plan operators.
United’s loss for the period was $565 million, or $2.96 a diluted share, compared with year-ago net income of $116 million, or 57 cents. The charge was equivalent to $3.62 a share after tax. Profit before the charge was $139 million, or 66 cents, matching estimates of analysts surveyed by First Call Corp.
In a conference call, company officials said full-year earnings should be $2.60 to $2.75 a share. The average estimate was for $2.75.
United said the charge was for reorganizing into six business segments and getting out of some markets. Of the $900-million pretax charge, $620 million was for quitting certain markets.
Louisville, Ky.-based Humana said it was meeting with United HealthCare this week to discuss the impact of these changes on the proposed acquisition.
The decline in United’s stock price Thursday wiped out about $3.2 billion in market capitalization. It also reduces the value of its Humana bid, which calls for United to issue 86 million shares and assume $850 million in debt, to about $4 billion from $6.3 billion when it was announced. United plans to exchange 0.5 of its shares for each Humana share.
At a Glance:
* Boston Chicken Inc. posted a larger-than-expected fiscal second-quarter loss as the operator of Boston Market restaurants took charges related to buying back stores in an attempt to revive its business. The quick-service chicken restaurant chain had a loss before charges of $49.5 million, or 68 cents a diluted share in the quarter ended July 13, compared with net income of $17.2 million, or 25 cents, a year ago. The company was expected to lose 51 cents.
Golden, Colo.-based Boston Chicken said it took charges of about $40 million for provisions for losses on loans and other items, and about $35 million for losses related to area developers. The charges resulted from the company’s plan to end its franchise business and buy back stores. Boston Chicken owned 409 stores at the end of the second quarter; it now owns more than 900.
* EchoStar Communications Corp., the No. 3 U.S. satellite TV company, narrowed its second-quarter loss, beating analysts’ expectations, as it added 180,000 new subscribers. The company reported a loss of $45.7 million, or $1.21 a diluted share after the payment of preferred dividends, compared with a loss of $63.8 million, or $1.54 a share, a year earlier. The loss compared favorably to the average estimate of $1.54 a share.
* Pennzoil Co., an oil-exploration company and maker of the No. 1 U.S. brand of motor oil, said second-quarter profit fell 75% as oil prices dipped to 12-year lows. Net income fell to $8.8 million, or 17 cents a diluted share, from $35.6 million, or 75 cents, before charges in the year-earlier quarter. Pennzoil was expected to earn 11 cents a share.
* Sara Lee Corp. said fiscal fourth-quarter earnings rose 8.2% on savings from cost cuts and as higher sales of packaged meat, coffee and household goods offset lower profit from some clothing sales. Net income at the maker of the Wonderbra, Coach leather goods and Jimmy Dean meats rose to $303 million, or 62 cents a diluted share, from $280 million, or 55 cents, a year earlier. The company was expected to earn 63 cents in the period ended June 27.
