Two prominent health maintenance organizations based in California have agreed to a merger that will create the country's fifth-largest HMO with more than 1.5 million enrollees in eight states and annual revenues of more than $3.25 billion.
FHP International said it's reached an agreement in principle in which Concord-based TakeCare will merge into a wholly owned subsidiary of Fountain Valley-based FHP. Analysts said the merged companies will complement each other in California because FHP is strong in the southern portion of the state while TakeCare is a major force in the north.
The merger marks the second blockbuster deal involving West Coast HMO operators in the last six months. In September, Woodland Hills, Calif.-based Health Net and Pueblo, Colo.-based QualMed said they would merge their operations in California and five other western states (Sept. 6, 1993, p. 4). Health Net stockholders have approved that merger; QualMed's shareholders will vote on the proposed business combination at a special meeting on Jan. 25.
FHP valued the proposed merger at $800 million, or $62 per share of TakeCare common stock. After the announcement last week, TakeCare's common stock rose 13% to $58.25 per share in trading on the national over-the-counter market.
FHP said the purchase price would consist of 35% cash, 15% of FHP common stock and 50% in convertible preferred stock. FHP's common stock also rose $1.50 to $28 per share at the end of trading on Jan. 12.
Both companies were rumored to be looking for new partners as part of a trend of consolidation in California to create statewide HMO operators.
"It takes longer to build than to buy," said Mary O'Connell, vice president of Louis Nicoud & Associate, San Francisco. She said the proposed merger would benefit FHP by doubling its enrollment in California to 800,000 enrollees.
FHP also is the nation's largest holder of Medicare risk contracts, while TakeCare hasn't entered that market.-Paul J. Kenkel