Independence proves panacea for HealthNet; buyout rumors lift stock of insurer.

Just one year ago it seemed as if HealthNet Inc. was next in line to be acquired following the purchases of Wellpoint Health Networks and PacifiCare Health Systems by out-of-state insurers.

But lately the Woodland Hills company has proven the speculation wrong, carrying out a $450 million stock buyback program, one of several strategies it is pursuing to retain its independence in the consolidating health insurance industry.

HealthNet, which remains the state's largest, locally based for-profit health insurer, just reported a solid third quarter, refinanced its debt over the summer and earlier this year even made its own modest acquisition, purchasing a small Long Beach-based competitor, Universal Care Inc.

All in all, it's not acting like it's on the block, though the company has not ruled out an acquisition should the price be right.

"If someone came to the board with an offer they couldn't refuse, they wouldn't refuse it," admits Stephen Lynch, president of regional health plans for HealthNet. "But we really see a future in being independent, and we're not running the company as if it's for sale."

HealthNet, which has more than 6.6 million members in 27 states and insures around a half-million people in Los Angeles, has focused on continuing to grow its membership in order to meet Wall Street expectations and improve its stock price, which closed at $44.56 on Nov. 29. The stock is down more than 12 percent from the first of the year.

Recently, it launched programs targeting small businesses, Medicare-eligible seniors and Latinos, with the latter groups invited to storefronts in shopping malls and Hispanic neighborhoods for the personal attention important to both demographics. A cross-border provider network that lets Mexican immigrant members choose in which country they obtain care is also proving popular.

So far, the outreach programs have worked, helping push up third-quarter net income 16 percent to $90.9 million and revenues 6 percent to $3.25 billion. Some of the best net member gains came from the Western United States.

That's not to say that the acquisition speculation has abated. Changing political winds in Washington D.C. and Sacramento, on top of continuing demand by Wall Street to keep up profit margins, may put pressure on potential suitors to make their move while they can.

Wall Street analysts say that acquisition speculation keeps a premium built into Health Net's stock price.

"California is a huge but rather unusual market that requires a certain expertise to be successful in," notes David Shove, an analyst for Prudential Equity Group LLC. "If you want a large local presence in California, maybe the best way in is to buy one of the local players--and those are running out."

In December 2004, Thousand Oaks-based WellPoint Health Networks, the parent of Blue Cross of California, launched the consolidation trend by merging with Indianapolis-based Anthem Inc. Anthem changed its name to WellPoint Inc. but its chief executive and corporate headquarters stayed in the Midwest.

Minnetonka, Minn.-based UnitedHealth Group Inc. followed in Anthem's footsteps last December with its acquisition of Cypress-based PacifiCare Health Systems Inc.

But Health Net watchers note that any acquisition attempt won't be easy, pointing out that the company is one of only three in the country that handles health care for members of the U.S. armed forces, veterans and dependents under a program known as Tricare.

Thomas Carroll, an analyst at Stifel, Nicolaus & Co., noted that United had a chance to bid on a piece of the Tricare business but failed to do so, and so might not want to keep that business line. Moreover, another big national health insurer seen as the most likely Health Net suitor, Aetna Inc., already has a third of the Tricare business and the Department of Defense would probably not like it to gain a bigger share.

"Their cash flow is coming back nicely, and their Medicare business is growing in the right direction, which as an investor you'd want to see in that sector for 2007," said Carroll. "I wouldn't be surprised to see a press release that someone is buying them, but I've never viewed them as a compelling takeout candidate. Whoever buys Health Net would have to decide what to do with Tricare."

By DEBORAH CROWE

Staff Reporter