Bankers put lower value on CareFirst


The value of CareFirst BlueCross BlueShield - one of the key issues in CareFirst's hotly contested sale plan - is less than it was last summer, investment bankers have advised the insurance commissioner.

With stock prices slipping, CareFirst is now worth $1.45 billion to $1.65 billion, the Blackstone Group told Commissioner Steven B. Larsen. In August, Blackstone offered a wider range of valuation estimates, but those estimates centered on $1.8 billion.

CareFirst wants to convert to for-profit operation and sell itself to California-based WellPoint Health Networks Inc. WellPoint and CareFirst negotiated a price of $1.37 billion.

Larsen has to rule on whether the deal is in the public interest and whether the price is fair.

His decision, which had been expected tomorrow, has been pushed into next week, as the snow closed the insurance administration.

The lower valuation by Blackstone, submitted last week, could make it more likely Larsen will specify a price acceptable to WellPoint.

Analysts have speculated that WellPoint would be willing to pay more than its current offer, but would walk away if Larsen set a price that was too high

"We're encouraged by the revised report," Ken Ferber, a WellPoint spokesman, said yesterday. "It's far more in line with what our experts have told us."

On the other hand, a lower value might make the deal less attractive to legislators, who will have 90 days to review Larsen's decision. Maryland's share of the purchase price will go to a health-related foundation or similar public purpose.

CareFirst has tried to sell the deal to skeptical lawmakers by stressing that the sale money could be used to provide coverage for the uninsured, prescription benefits for the elderly or as a subsidy to health clinics.

In another updated report, consultant Delmarva Foundation for Improving Health Care Quality presented a somewhat more negative view of the deal's potential impact on consumers and health care providers.

In a modification to its earlier report projecting neutral or slightly negative impact overall, Delmarva noted there are several areas where WellPoint "did not provide documentation that would have allowed the Delmarva experts to make a comparative analysis," particularly in how WellPoint decides when to pay for care and how to measure medical quality.

"Therefore, in a number of areas, the impact is inconclusive, i.e., the effects of such an acquisition by a for-profit entity are unknown, and potentially could affect the stakeholders negatively," Delmarva's update report concluded. WellPoint has said the requested information includes business secrets.

Consumer impact, like fair price, is one of the factors Larsen must consider in deciding whether to approve the CareFirst conversion and sale.

The updated Delmarva report was posted on the insurance administration Web site.

The Blackstone valuation update has not been made public; a copy was obtained by The Sun.

Although Blackstone adjusted its valuation formulas slightly to account for tax credits not included in August, the main cause of the lower valuation is a decline in stock prices for health insurers.

"It's not surprising," Gregory Crawford, an analyst for Fox-Pitt Kelton, said yesterday. "Recently, the managed-care group has been under pressure, and the stocks have come down."

Crawford's company compiles an index of a dozen stocks of large and medium-size health insurers, and Crawford said it's fallen about 14 percent since August.

That's about how much Blackstone's valuation of CareFirst has dropped over that period.

The Blackstone update also notes that WellPoint has lowered its estimate on CareFirst's rate of earnings growth, from 15 percent a year to 10 percent, based on financial performance over the last six months.

Valuations are built by first looking at comparable transactions and at other publicly traded companies in the industry.

The consultants then develop various factors by which they multiply such measures as future earnings in establishing valuation.

The updated valuation report, for example, notes that publicly traded Blue Cross plans are now trading, on average, at 13.3 times 2002 earnings per share - down from a multiple of 17.1 in August. Non-Blue regional insurers (including Maryland-based Mid Atlantic Medical Services Inc. and Coventry Health Care Inc.) are trading at 11.5 times 2002 earnings per share, down from 13.3 in August.

The deal is also being reviewed by regulators in Delaware and the District of Columbia, where CareFirst also operates.

By the time those jurisdictions complete their hearings, it will be summer or fall - and CareFirst's value could have gone up or down as much as it changed in the period since the initial Blackstone valuation.

Crawford said regulators should not base a decision on whether the value is likely to go up or down over the next few months - an exercise he compared to an individual investor's effort to "time the market" on a stock.

A consultant to District regulators, Cain Brothers, reported last month that CareFirst is worth between $1.65 and $1.75 billion.

An investment banker working for WellPoint testified at a Larsen hearing in December that $1.3 billion was "a fair number. We would call it an aggressive number, given the changes in the marketplace."

Fox-Pitt Kelton will do a valuation for Delaware; Crawford said his unit is separate from the investment banking unit that will be advising Delaware. An advocacy group in the District has commissioned yet another valuation.

Besides the overall price, another uncertainty in the deal is how the money would be divided among the jurisdictions. Cain Brothers attributed 55 percent of the value of CareFirst to the District Blue Cross plan, which has been more profitable the past few years, and only 28 percent to the Maryland segment.

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