TakeCare ended its exclusive merger talks with FHP International and said it will talk with other potential merger partners in addition to FHP.
Concord, Calif.-based TakeCare said its board wants to discuss offers from some other companies, which it would Managed carenot name, before making any further decisions about the sale of the company.
Observers in California have said for months that TakeCare, a dominant HMO in the San Francisco Bay area, had put itself on the auction block. They said TakeCare's long-term goal apparently has been to sell the company at a profit.
The news was a blow to Orange County-based FHP, which is having trouble cracking the Northern California HMO market, analysts said.
Shares of TakeCare jumped $2.875 on Feb. 9 to $66.875 in NASDAQ trading, while FHP's stock fell $1.125 to $26.75.
On Jan. 10, FHP, Fountain Valley, Calif., said it reached an agreement in principle to merge TakeCare into a wholly owned subsidiary of FHP. FHP valued the deal at $800 million, or $62 per share of TakeCare's common stock. The deal consisted of 35% cash, 15% FHP common stock and 50% convertible preferred stock. Under the agreement, TakeCare was required to negotiate exclusively with FHP through Feb. 7 (Jan. 17, p. 14).
However, on Jan. 18, a group of private shareholders associated with Pittsburgh-based Henry L. Hillman, which represents 22% of TakeCare's stock, filed suit against the company, alleging it accepted FHP's offer over a superior all-stock offer by United HealthCare Corp., a Minnetonka, Minn.-based HMO operator.
The Hillman group controls about half of the equity in TakeCare that's not publicly owned, said Peter A. Wadsworth, a New York-based investment banker representing healthcare organizations.
At the time, a majority of TakeCare's board said United's all-stock bid wasn't high enough to offset the risk when compared with FHP's bid, the company said. TakeCare said the Hillman group supported the all-stock bid because the members wanted to avoid paying a hefty capital gains tax on the investment in TakeCare, which the group acquired at an average price of 71 cents a share.
Mr. Wadsworth said many HMOs are already fully priced, which increases the risk that a suitor might pay too much for a rival health plan. Even so, many HMOs "have their pocketbooks open" for potential deals, he said.
He noted, for example, that Cypress, Calif.-based PacifiCare Health Systems recently established a $130 million revolving line of credit with Chase Manhattan Bank to finance healthcare acquisitions and investments.