Two suitors step up to vie for Health Net: Pacific Mutual, Shamrock Investments bid for HMO.

Two suitors step up to vie for Health Net

Two rival bids last week surfaced for Health Net, the 840,000-enrollee non-profit health maintenance organization that has asked state approval to convert into a for-profit health plan.

Giant insurer Pacific Mutual Life Insurance Co., based in Newport Beach, confirmed last week it was in talks with Health Net, and Los Angeles-based Shamrock Investments (not related to Shamrock Holdings Co. in Burbank) offered $40 million in cash and $160 million in notes for Health Net, the state's second-largest HMO.

Officials from Woodland Hills-based Health Net last week declined to discuss the bids.

Health Net, headed by Roger Greaves, 54, chairman and chief executive, in March asked the state to let it convert to for-profit status in exchange for a $108 million contribution to a charitable foundation, $15 million in cash and $93 million in notes. The price works out to about $128 per Health Net enrollee.

Under state law, when a non-profit HMO converts to for-profit, it must compensate taxpayers for the years in which it was subsidized. Under the law, Health Net can only be taken private, or bought out, at "fair market value."

Health Net hired accountants who computed the HMO's value to be $104 million, a figure upped to $108 million in talks with state regulators.

Health Net's plan has raised eyebrows in the Southland financial community, with critics noting that similar HMOs - Fountain Valley-based FHP International and Cypress-based PacifiCare - are trading on Wall Street for between $473 and $1,052 per member, several times Health Net's price. The two HMOs actually posted smaller profits last year than Health Net.

Too, some note, Health Net could "go public" and sell stock in two years, raising upwards of $450 million at current market prices. The Health Net investors who put up the $15 million down payment could see enormous profits on their equity investments should the HMO go public - returns of 2,000 percent and more are possible, and even likely if the stock market for HMOs holds up.

Last week, Pacific Mutual took an implicit dig at Health Net's proposed conversion price. Pacific Mutual issued a statement declaring, "We believe we can provide the necessary up-front capital to properly compensate the public for the value of the company as it moves from non-profit to for-profit status."

The $9.8 billion-in-assets Pacific Mutual said it liked the fit of Health Net, an HMO, with its traditional health insurance offerings, and it has hired Los Angeles-based law firm O'Melveny & Myers and brokerage house Goldman Sachs to assist with its acquisition of the HMO.