The tentative merger between two major California medical malpractice insurers is facing fierce opposition from a former board member who is also a shareholder, and who could foil the plan to create the largest insurer of physician and surgeon professional liability insurance in the country.
On Oct. 16, the Doctors Co., a privately held Napa, Calif., medical malpractice carrier, announced it had entered into a tentative agreement to buy SCPIE Holdings, a publicly traded liability insurer based in Los Angeles, for $28 a share, or about $281 million cash.
Richard Anderson, M.D., chairman and chief executive officer of the Doctors Co., said in a prepared statement announcing the deal that the two physician-founded companies would cover nearly 19,000 physicians in the state. Members will benefit from the enhanced value of a financially strong combined organization that is relentlessly committed to protecting, defending and rewarding member physicians.
The morning following the announcement, executives from SCPIE (pronounced skippy) held a conference call with investors and defended the deals terms.
The board spent an exhaustive amount of time reviewing all the proposals and, and in their judgment, the boards judgment, this was the very best proposal, said Donald Zuk, president and CEO of SCPIE, during the call.
SCPIE executives, who had been shopping the company for a sale since January, say the Doctors Co. supplied the best deal, and that other stock offers were too risky. They say that no offer was better than $28 a share.
If you take a stock today, that doesnt tell you what the price is going to be tomorrow or three months from now or six months from or two years from now, Robert Tschudy, SCPIEs chief financial officer, said on the call.
But Joseph Stilwell, who owns 9% of outstanding shares, resigned from the board the day the deal was announced, citing his opposition to the company accepting an inferior offer, according to his resignation letter.
Two days later, in a letter to SCPIE Board Chairman Mitchell Karlan, M.D., filed with the Securities and Exchange Commission, Stilwell accused Zuk of making false and misleading statements on the investor call, when he says the company received no offers in excess of $28 a share. I was shocked as I heard his comments, Stilwell wrote.
Karlan fired back with his own letter to Stilwell, saying the two highest bids considered each had a face value of $28, but the cash deal from the Doctors Co. was more solid. Now that you understand the facts, we are confident that you will not make such incorrect statements in the future, Karlan wrote.
Reached by phone, Stilwell says he intends to aggressively oppose the merger.
This will never happen, Stilwell says. If anyone looks at this rationally, they can see that no financial institution will support this.
Stilwell, a savvy investor who has successfully made money off other insurance properties, says it is unlikely that other board members will oppose the deal, saying that as usual they fell in line.
But he says stockholders could block the sale. We do have experience with this sort of thing, he says. I dont think this deal will ever fly.
Howard Bender, spokesman for SCPIE, defended the proposed sale to the Doctors Co. We obviously think it was the best deal presented to us, he says. Asked whether shareholders will support the board and managements decision to accept this offer, he says, That I dont know. We hope so.
Several analysts and investors in SCPIE who asked not to be identified in this article, say they didnt think Stilwell could stop the deal.
Stilwell deserves a lot of credit and a lot of respect, one investor says. He has a track record of buying troubled medical malpractice stocks and rode them to recovery. But this has been on the market for 10 months.
Brad Evans, vice president and portfolio manager at Heartland Funds, said during the conference call that the price of the deal is at the low end in terms of valuation compared with SCPIEs publicly traded competitors.
We are in a very, very soft market, Zuk replied. Growth is extremely hard. It is our opinion, managements opinion, that it will be at least two years, more like three years before the market hardens again.
Observers say that missteps by SCPIE, including wading into the re-insurance market, ultimately hurt the company and made it vulnerable to a sale. The company has a Standard & Poors quality ranking of a B-. Its revenue in 2006 was nearly $144 million, down 58% from $339 million in 2002.
But because of a strict regulatory environment, the medical malpractice market in California has made it a stable and profitable business, analysts say.
That, they say, makes this a good deal for the Doctors Co., which declined interview requests for this article.
The California Medical Association is taking no position on the merger, and referred all requests for comment to the Los Angeles County Medical Association. A spokeswoman says the association was still reviewing the deal and had no immediate comment.
A SCPIE shareholder vote is expected in February 2008, and the acquisition also needs approval from federal regulators as well as state regulators in Arkansas, California and Delaware.
In the meantime, Stilwell says he wont go away quietly.
The people who should go away are the people who dont have a financial interest in this company, he says. This franchise is worth more.