Merger of health care concerns creates mega-insurer.

Combined assets of new entity look to reach $2 billion

If all goes according to plan, a new multibillion-dollar managed care company will emerge without any cash, debt collateral or stock issues changing hands.

Combined annual revenues of $6.5 billion and assets of over $2 billion would result from the proposed merger of Burbank-based UniHealth America with San Francisco health insurance giant Blue Shield of California. Once merged, the new entity would serve more than 4.5 million Californians, a market share second only to Kaiser Permanente's.

UniHealth America is one of the nation's largest nonprofit health care systems. In the fiscal year ending Sept. 1992, the company had $2.9 billion in revenues. It encompasses 11 nonprofit medical centers, three medical group affiliations, CareAmerica Health Plans and a majority interest in PacifiCare Health Systems.

Blue Shield is one of the state's oldest and largest providers of health coverage and managed care. It also owns a privately held, for-profit insurance company called CPIC.

Though the deal is not subject to scrutiny by the Securities and Exchange Commission, stockholders or lending agents, it does merit the in-house inspection of certain financial considerations. For example, a combined balance sheet could merit better credit ratings -- thus, lower interest rates and increased borrowing opportunities -- while preserving a tax-exempt status.

Officials from both organizations say the urge to merge was market driven rather than cost driven, pointing to a host of complementary services. For Blue Shield President Peter Scott, joining up with UniHealth's team of physicians and hospitals creates a much more effective way of managing health care systems than the current alternative: an isolated environment of utilization reviews and hospitalization-stay counts.

Scott also noted that, down the road, a merged entity would be better positioned for consolidation with other delivery systems and HMOs around the state.

UniHealth Chief Financial Officer Eric Benveniste agreed that the decision to merge was mainly made for strategic reasons though, longer term, potential savings could be generated once issues involving vendor's contracts and other operational issues are addressed.

Benveniste predicted it would take three to six months to complete the merger. Consolidation is subject to approval by California's Department of Corporations and the Blue Shield National Board, as well as from the respective local boards of directors. The national board sets basic policy for the various affiliated Blue Shield operations in every state in the union.

Accounting giant Ernst & Young's Century City branch is acting as adviser to UniHealth on tax and other business implications. Musick, Peeler & Garrett and O'Melveny & Myers are coordinating the merger's legal aspects for UniHealth. Blue Shield has consulted with Coopers & Lybrand's San Francisco office as well as the Institute for the Future, a research and consulting firm in Menlo Park.

The proposed "merger of equals" as yet does not have a name. The Blue Shield moniker will continue to exist as one of the new company's units. Blue Shield will also maintain its identity and affiliation with the national Blue Cross and Blue Shield Association of 71 member plans.

The new company will be located in Southern California. Blue Shield President Peter Scott would become the new company's chairman. Perry Hartshorn is slated to become its chief executive; he currently serves as CEO of UniHealth and is chairman of PacifiCare's board of directors.

PacifiCare Healthcare Systems (PHSY) trades on the NASDAQ. The stock gained $2.50 a share on the day of the merger announcement, closing at $40.50, its high for the day.

Analyst Michael LeConey, who follows the stock for RAS Securities, predicted it will go to $50 near term. "PacifiCare wants to get into the small employer market, and Blue Shield insures a lot of small employers," said Leconey, adding, "This could be a substantial plus."

Dean Witter's Tom Richter, a long time PacifiCare fan, does not see any near term impact, though he looks for a $60 stock price within the next 12-18 months. Says Richter, "it's one of the nation's best positioned and best managed health benefits providers."