Stock Sale Values FHP at Four Times Buyout Price

FHP, a Fountain Valley-based health maintenance organization, on Wednesday made a public offering of stock with a market value of about $150 million or nearly four times what was paid by its managers when they converted FHP from nonprofit status eight months ago.

The California attorney general and Consumers Union had criticized FHP’s conversion last November, claiming that the $38.6 million that FHP’s managers paid for the company was far less than it was actually worth.

FHP sold 3 million common shares on Wednesday at $12 each, grossing about $25.3 million for FHP and just under $10.6 million for the FHP Foundation, the charitable trust established last year as part of the conversion.

Insiders, including Dr. Robert Gumbiner, FHP’s founder, chairman and chief executive, continue to hold a 75.9% stake in the company worth about $114 million at current market value.

FHP officials said in a prepared statement that proceeds of the offering would be used to reduce debt, increase working capital and to fund “possible future expansion activities.� David LeSueur, FHP’s vice president, declined to elaborate.

The California Department of Corporations may permit managers of a nonprofit HMO to convert the company to a money-making entity after they donate an amount equal to the HMO’s net worth to charity, often a trust established by the managers themselves.

In recent months, HMO conversions have come under fire from critics who say that because the HMO’s managers act as both buyers and “sellers� of a nonprofit corporation, there is a conflict of interest.

Currently, California lawmakers are considering legislation thatwould strip the Department of Corporations of its authority to assess the fairness of HMO conversions, transferring that power instead to the attorney general. On Wednesday, the Assembly Ways and Means Committee approved by a margin of 12 to 7 the bill authored by Assemblyman Alister McAlister (D-San Jose). The bill is likely to go before the full Assembly for a vote next week. Also on Wednesday, the Senate Insurance Committee approved the Senate’s version of the bill. At nearly $40 million, FHP’s conversion was already the most expensive in California before Maxicare Health Plans stepped in with an offer to buy FHP for $50 million. When the takeover bid by the giant Los Angeles-based HMO was rebuffed, Maxicare filed suit to block the conversion.

Despite the support of the attorney general’s office, which also filed suit against FHP, a Los Angeles Superior Court judge ruled that HMOs switching to for-profit status are not obliged to sell out to the highest bidder.

Still arguing that the difference between the $38.6 million donated to the FHP Foundation and the company’s actual value was lost to charity, James Schwartz, assistant attorney general, said the offering is a “useful piece of evidence� in his office’s suit against FHP.

‘Not Surprised’ by Valuation

“It confirms our original belief that the value of the company was in excess of $38.6 million,� Schwartz said in a telephone interview. “We are not that surprised by the valuation.�

Founded 25 years ago, FHP offers prepaid medical and dental care through a network of 22 company-operated clinics in Southern California, Utah and Guam. In Arizona and New Mexico, FHP contracts with private physicians and physician groups.

In February, the company opened its 117-bed FHP Hospital in Fountain Valley.