NU Online News Service, June 4, 2003, 8:04 p.m. EDT – WellPoint Health Networks Inc., Thousand Oaks, Calif., has made another effort to diversify its membership by agreeing to buy Cobalt Corp., Milwaukee, for about $906 million.

WellPoint, a publicly traded company that started out a decade ago as the parent of Blue Cross of California, now controls Blues plans in Georgia and Missouri as well as the national UNICARE health insurance operation. But about half of its 13.5 million major medical members are still concentrated in California.

Cobalt, the publicly traded parent company of Blue Cross & Blue Shield United of Wisconsin, has 806,000 members and exclusive rights to use the Cross and Shield in Wisconsin. It reported $74 million in net income for 2002 on $1.5 billion in revenue.

Completing the WellPoint deal today would give Cobalt shareholders an average of $1,120 per Cobalt major medical subscriber. The price is $600 million over Cobalt’s book value, according to Standard & Poor’s Ratings Services, New York.

Acquiring Cobalt would help WellPoint push the percentage of its major medical subscribers living outside California over 53%, further reducing its dependence on the California economy.

WellPoint and Cobalt say they hope to complete their deal by the end of the year, but they note that they must first get approval from regulators and Cobalt’s shareholders.

Attacks by consumer activists and regulators in Maryland recently persuaded WellPoint to abandon efforts to acquire CareFirst Inc., Owings Mills, Md., the nonprofit parent company of Blues plans in Delaware, Maryland, northern Virginia and the District of Columbia.

Cobalt executives formed Cobalt by converting Wisconsin Blue, a nonprofit company, into a for-profit company. Wisconsin regulators required Cobalt to contribute the full pre-conversion value of Wisconsin Blue to a new public health charity, the Wisconsin United for Health Foundation, before proceeding with the conversion. As a result of that requirement, the foundation owns about 60% of Cobalt’s shares.

The foundation, which could get more than $500 million from the WellPoint deal, has agreed to vote in favor of the deal, according to WellPoint and Cobalt.

WellPoint has agreed to pay $20.50 per Cobalt share, with half of the payment consisting of cash and half of stock. The price could fall if the price of WellPoint stock falls, but the agreement is arranged so that the price will not fall below $19 per share.

Analysts in the Chicago office of Fitch Ratings say they will maintain a “stable” outlook for WellPoint, even though they expect WellPoint to borrow to pay part of the cost of the Cobalt purchase.

Fitch has given WellPoint’s senior debt a rating of A minus, and it has given the main health insurance subsidiaries an insurer financial strength rating of AA minus.

WellPoint is a strong company that is building a strong presence in the Midwest, and the leverage level is within expectations for a company with its ratings, Fitch says.

“Any debt issued to finance the acquisition is not expected to push WellPoint’s leverage beyond 30%,” Fitch says.

But, even though integration of other acquisitions seems to be going well, WellPoint could have problems digesting Cobalt, Fitch says.

Standard & Poor’s says it is putting its A minus credit rating for WellPoint on “CreditWatch negative.”

WellPoint can afford the Cobalt deal, but the price includes “a significant share of goodwill and intangibles,” S&P says