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Higher price for CareFirst appears likely


WellPoint Health Networks Inc. almost certainly will not be able to acquire CareFirst BlueCross BlueShield for the $1.3 billion it has already offered - but how much higher the California-based company might be willing to go isn't known, analysts said yesterday.

Also, they said, whether WellPoint completes its deal to buy Maryland's largest health insurer will depend on other issues, and ultimately on the state legislature, where there has been strong opposition to the deal.

On Monday, Maryland Insurance Commissioner Steven B. Larsen released a consultant's report saying that CareFirst is worth more than the $1.3 billion price set in the WellPoint-CareFirst sale agreement. The consultant, Blackstone Group, didn't arrive at a firm price; instead it used four different methods to come up with a range of values from $1.35 billion to $2.25 billion.

David H. Shove, an analyst with Prudential Securities in New York, predicted that legislators would demand a price at the high end of Blackstone's range - probably higher than WellPoint is willing to go.

"We continue to be skeptical that this deal will come to fruition," Shove wrote in a research note.

Another analyst, Clifford A. Hewitt of Legg Mason Wood Walker, said, "The state legislature is the gorilla in the room," adding another layer of uncertainty even if Larsen sets a price that WellPoint is comfortable with.

State Sen. Robert Neall, who has been among the most vociferous critics of the deal, said he's not sure that a higher price will sway many lawmakers. "It depends on who you talk to," he said - with many opponents supporting a local, nonprofit Blue Cross plan, regardless of the purchase price.

Dawn Touzin of Community Catalyst, a Boston-based group that works with community organizations in reviewing Blue Cross conversions, said consumers fear that a for-profit insurer will raise premiums, and that a national insurer would be less responsive to community needs than a locally based one.

She said price has been an issue in nearly every Blue Cross conversion, with the final payment generally exceeding the initially agreed-upon sales price. The money from a sale would go to a public health purpose, such as a health-related foundation.

Neall said, "It's too early to speculate" on how the legislature will act on the transaction. A ruling from Larsen is expected around the end of the year, and many legislators would need to review his finding before deciding, he said.

The deal also must pass regulatory scrutiny in Delaware and the District of Columbia, and if the sale goes through, the money would be divided among the jurisdictions.

While legislative reaction is difficult to predict, analysts said the Blackstone report did offer the prospect of a price that's acceptable to both WellPoint and regulators.

"I think there's some common ground in here," said Gregory Crawford, of the San Francisco office of Fox-Pitt, Kelton. "There's a huge valuation band here, and the lower end of the range is not all that different from the WellPoint offer."

On the other hand, he said, if the price gets too high, WellPoint will kill the deal. "It's not as if the regulators have WellPoint by the throat," he said.

Another analyst, Eric L. Veiel of Deutsche Bank Securities in Baltimore, yesterday called the valuation report "a small, positive next step in the merger process." He added, "However, it is important to remember that the approval process does not end with price."

On the consumer side, those issues include whether the state is better off keeping a local nonprofit plan.

On the WellPoint-CareFirst side, issues include other stipulations that regulators or legislators could attach to the deal. Maryland lawmakers have already called for WellPoint to pay in cash, rather than the cash-and-stock deal negotiated with CareFirst. Other concerns include employment levels and consumer protections.

So far, WellPoint has not identified a price at which it would kill the deal, said Ken Ferber, its vice president for corporate communications.

WellPoint has also launched the debate over price, with a two-page letter to Larsen registering preliminary objections to some of the calculations done by Blackstone. WellPoint said Blackstone failed to account for the premium tax CareFirst would have to pay if it were acquired. As a nonprofit, it has been exempt from the tax.

Correcting for that, WellPoint said, the value of CareFirst would be between $1.07 billion and $1.56 billion.

Crawford said the debate over the value of Owings Mills-based CareFirst is likely to focus not only on technical calculations, but on whether CareFirst "had been shopped openly and fairly."

Another consultant will be reviewing the actions of CareFirst's board in negotiating the deal, but Blackstone's report did have some comments on the process.

On the positive side, Blackstone commented, "WellPoint sensed that it was in a competitive process," so knew it needed to make an adequate offer. Also, another potential acquirer could make an offer at any point.

On the other hand, Blackstone said, CareFirst might not have gotten the best price because:

Merger bonuses for CareFirst executives were a de facto increase in the purchase price worth $41.3 million, including taxes. After the price was set, the Maryland legislature this year outlawed the bonuses.

Another potential bidder, Anthem Inc., "was excluded from the process without CareFirst's understanding of what Anthem might be prepared to pay or what its vision for the business might be."

Factors other than price, such as headquarters location and roles for management "received significant attention in the process."

Larsen expects to hold hearings this fall and issue a ruling around the end of the year.

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