CareFirst worth more, outside analyst reports


CareFirst BlueCross BlueShield is worth more than the $1.3 billion price it negotiated for itself - probably hundreds of millions of dollars more - a consultant to the state insurance commissioner concluded in a report released yesterday.

Blackstone Group, a New York investment adviser, did not put a single number on the value of CareFirst. Instead, it used four methods to estimate its value and provided answers - ranging from $1.35 billion to $2.25 billion - using each method.

Analysts predicted that the numbers would not lead WellPoint Health Networks Inc., the California insurer that wants to buy CareFirst, to walk away from the deal at this point.

"My sense is that the range they're talking about, [with most of the estimates between] $1.4 billion and $1.9 billion, is that this is not a deal-breaker," said Clifford A. Hewitt, an analyst for Legg Mason Wood Walker Inc. in Baltimore.

Hewitt said he is sure that at some point, WellPoint would decide the price was too high, but he said he isn't sure what that point is.

Blackstone noted that because CareFirst and WellPoint signed their sale agreement in November, stock prices for CareFirst's peers in insurance have jumped by about a third. Also, the $4.3 billion acquisition of Virginia's Blue Cross plan, Trigon Inc., in April established a higher comparison price to use in judging CareFirst's value.

Maryland Insurance Commissioner Steven B. Larsen, who released the report yesterday without commenting, expects to conduct public hearings this fall on the value of CareFirst and on other issues.

Larsen will approve or reject the deal, or approve it conditionally, based on whether he deems it to be in the public interest and whether he considers the price to be fair. After his ruling, expected near the end of the year, the legislature will have 90 days to review it.

Ken Ferber, vice president for corporate communications for WellPoint, said his company's decision on whether to go ahead with the deal will depend not only on the price, but also on other conditions that could be imposed by regulators or lawmakers in Maryland, Delaware and the District of Columbia.

In other states, insurance commissioners have imposed conditions such as maintaining employment levels.

"It comes down more to details than to the price tag," Ferber said. "We have to keep the conservative structure that made the company successful. We won't do a deal that doesn't make sense."

WellPoint said Blackstone had not allowed for the premium tax that CareFirst, which has been exempt from that tax, would have to pay if the deal was approved. That would lower forecasts of CareFirst's profits and therefore its value. Taking that into account, WellPoint said CareFirst was worth $1.07 billion to $1.56 billion.

In a statement, CareFirst said it had reached its $1.3 billion price in "an open, competitive bidding process" and that it had considered other factors, such as maintaining jobs, in negotiating with potential acquirers.

Even those opposed to, or skeptical about, the deal agreed that issues beyond price will be important as Maryland and neighboring jurisdictions decide whether to permit CareFirst to convert to for-profit status and be sold to WellPoint.

The report "still hasn't answered the question of why it's in the best interest of the state to sell the company," said Del. Michael E. Busch, an Anne Arundel County Democrat who is chairman of the House Economic Matters Committee and who has criticized the deal.

Eric L. Veiel, a managed-care analyst in Baltimore for Deutsche Bank Securities, said, "If you're against the deal, you've got enough in here to grab onto. If you're for the deal, you've got even more to grab onto."

Some opponents of conversion quickly pointed to the report as vindication of some of their criticisms.

"It adds up to further questions about management's motives," said T. Michael Preston, executive director of the Medical and Chirurgical Faculty of Maryland, the state medical society, and a vocal opponent of the deal. "The number in and of itself isn't that important. What it bears on is the credibility of CareFirst management."

The report said deal bonuses for CareFirst executives, including $9.1 million to chief executive William L. Jews, are "a de facto increase in the purchase price" of $41.3 million. The bonuses have since been blocked by the Maryland legislature.

In addition to Blackstone, Larsen has consultants looking at the likely impact of a conversion and sale on consumers, at the process followed by CareFirst's board and at the operation of health-related "conversion foundations," which have generally received the money when Blue Cross plans convert to for-profit companies.

Larsen gave WellPoint until Sept. 27 to decide whether to proceed. After that, it will have to pay more for Larsen's consultants. In all, WellPoint stands to spend about $5 million for the Maryland consultants and yet-to-be-determined amounts in Washington and Delaware.

About a dozen Blues plans are for-profit, and several others are considering conversion. WellPoint and Anthem Inc., the Indiana-based company that bought Trigon, have been acquiring Blues plans, becoming two of the largest health insurers in the country.

The Blackstone report used four valuation techniques. Looking at stock prices for similar publicly traded companies, Blackstone set a range of $1.38 to $1.89 billion. Looking at prices in comparable transactions, the range was $1.5 to $1.8 billion. Projecting the value of earnings through "discounted cash flow analysis," the range was $1.35 to $1.75 billion.

Blackstone also used a cash flow analysis in which it added in half of the value of "synergies," the cost savings or extra revenue of a combined company.

That yielded the highest estimates, a range of $1.68 to $2.25 billion. Veiel and Hewitt said the benefits WellPoint can bring to the company should not be counted in judging the price.

CareFirst's investment bankers, Credit Suisse First Boston, in similar analyses last fall (except for the synergies adjustment), estimated CareFirst's worth at $1 billion to $1.58 billion.

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