Investment consultants hired by Maryland Insurance Commissioner Steve Larsen say WellPoint Health Networks of California should pay more than the $1.3 billion it has offered to buy CareFirst BlueCross and BlueShield of Maryland.

According to a report compiled by the Blackstone Group, the valuation adviser to the Maryland Insurance Administration (MIA), a fair value for CareFirst is estimated to be between $1.38 billion and $2.25 billion. The report does not identify just one fair value figure, but establishes ranges based on four different valuation methods.

"Valuation is a complex undertaking," says Maryland Insurance Commissioner Steven B. Larsen. "This report is the beginning, not the conclusion, of the valuation process the Insurance Administration must undertake in connection with this transaction."

Rocky road to conversion

The report is just the latest news in the WellPoint/CareFirst merger saga that has been unfolding since November 2001 when WellPoint announced its plans to acquire CareFirst for $450 million in cash and $850 million in WellPoint common stock. However, in the 2002 session of the Maryland General Assembly, lawmakers passed legislation requiring that WellPoint's purchase price of CareFirst be paid in all cash rather than the cash/stock split permitted in the agreement signed between the insurers.

Because this requirement is a material change to its merger agreement with CareFirst, WellPoint says it reserves the option to withdraw from the transaction. According to Larsen, WellPoint has until Sept. 27, 2002, to decide whether to withdraw its application. If the insurer does not withdraw, a public hearing on the valuation report will be held later this year. "The Insurance Administration will have no further comment at this time on the report or its implications for the transaction," according to the MIA.

Before the mega-deal can close, CareFirst must convert to for-profit status, an often lengthy process that can take companies up to a year or more to complete. In addition to seeking approval from state insurance regulators, CareFirst's Washington, D.C., affiliate must have its federal charter amended or repealed by Congress and obtain approval from the Washington, D.C., corporation counsel.

Both CareFirst and WellPoint say the entire purchase price in question will be used to fund charitable activities in Delaware, Maryland, and Washington, D.C., CareFirst's main service areas. This action is required by states when nonprofit organizations that have received considerable tax breaks through the years convert to for-profit businesses as a "payback" for those subsidies.

WellPoint, with 10 million members nationwide, already serves about 82,000 members in the Mid-Atlantic region under the Unicare name. CareFirst has more than 3 million members in the same region.