National Med to expand in Southland via acquisition.

AMI buyout would double its hospitals in L.A. County

While National Medical Enterprises' deal announced last week to acquire American Medical Holdings Inc. has garnered mixed reviews from the investment community, it would greatly expand the Santa Monica-based hospital operator's presence in Los Angeles and Orange counties.

Overnight, NME would double the number of hospitals it operates in Los Angeles County to 10. That would give it a significant and widespread presence in a region where that is considered a strength in order to bargain with managed care health plans, according to industry observers.

"There isn't that much geographic overlap (between the two companies)," said David Langness, spokesman for the Hospital Council of Southern California. "(American Medical) has a real presence in the San Fernando Valley and Orange County, while NME has a much stronger presence in central L.A. County and the inland area. This might be a marriage made in heaven -- so to speak."

NME operates Century City Hospital, USC University Hospital, Doctors Hospital of Lakewood, Garfield Medical Center and Lakewood Regional Medical Center. It also owns Los Alamitos Medical Center and Placentia Linda Community Hospital in Orange County and John F. Kennedy Memorial Hospital in the San Bernardino County community of Indio.

American Medical owns the AMI Encino-Tarzana Regional Medical Center; the AMI Medical Center of North Hollywood; AMI San Dimas Community Hospital and AMI South Bay Hospital. In Orange County, it owns the AMI Garden Grove Regional Medical Center and the AMI Irvine Regional Medical Center.

The deal also, on the face of it, would give NME a leg up on archrival and industry leader Columbia/HCA Inc. The Louisville, Ky.-based hospital operator snagged HealthTrust Inc. -- also being courted by NME -- the week before the AMI deal was announced.

Prior to that, Columbia/HCA operated no hospitals in Los Angeles County and only recently acquired a facility in Orange County. HealthTrust operates Westside Hospital in L.A.'s Mid-Wilshire district, a facility in Chino and four others in Northern California, according to Langness. Company officials have disclosed they are pursuing deals in the San Fernando Valley and Orange County.

As for the NME/AMI deal itself, the reaction in the investment community is mixed.

"It's too early to tell," said Ken Frankel of Los Angeles investment firm Drake Capital Securities Inc. Barat Pandya of brokerage firm Kemper Securities in Chicago concurred.

But Todd B. Richter, an analyst with the brokerage firm of Dean Witter Reynolds, all but condemned the deal, issuing a statement that it was a "desperate move" on NME's part and saying he doubted whether it could provide the critical mass NME would need to compete with Columbia/HCA.

Other analysts predicted NME's stock will remain flat for a while. The main reason: the investment community considered NME more of an acquisition target than an acquirer, and it would take on a sizable amount of debt -- including $1.2 billion of American Medical's -- to engineer the purchase.

"People had made some sizable bets in the stock market that NME would be acquired rather than an acquirer -- that is the true root of any negative comments," said Jeff Villwock, an analyst with the New Orleans securities firm of Johnson & Rice. "There are a lot of sellers out there at the moment."

Villwock was quick to dismiss any concerns about debt. "One thing that is being heard in a deal like this is that NME had an excellent balance sheet and now it's heavily leveraged," he said. "But these days, it's not that unusual.

"This transaction marks a new beginning for NME," he added. "It's a new chapter in their corporate life, and it's an excellent start."

Corporate financier plays key role in NME's acquisition move

David Dennis, 45, corporate financier in the Century City offices of securities brokerage Donaldson, Lufkin & Jenrette, is the man with the plan for the big merger between hospital giants National Medical Enterprises Inc. of Santa Monica and Dallas-based American Medical Holdings Inc.

While the transaction is being termed a merger, the real deal is that NME is buying AMI. How does one make sure there are no hidden land mines in AMI, a chain with $2.2 billion in revenues, 38 hospitals and 20,000 employees?

"Well, first, this (AMI) has been a publicly held company, and they have been disclosing material events all along," pointed out Dennis, who has been an investment banker for a 15 years, 10 with Merrill Lynch and five with DLJ. "In addition, our lawyers have been talking to their lawyers, our accountants have been discussing accounting methods with their accountants." Our senior people talked to their senior people. There is a lot of due diligence."

The merger terms call for AMI shareholders to get $19 a share, plus 42 percent of an NME share.

After the merger, NME Chairman Jeffrey Barbakow will assume the reins of a hospital company with 71 hospitals, $5.2 billion in revenues and 55,000 employees.

Dennis is part of a large, potent and still-growing investment banking and corporate finance shop DLJ has built in Century City. There are 55 professionals in the shop, more than double any other Los Angeles collection of investment bankers. Many former Drexel Burnham Lambert bankers now work at DLJ.

Last week, Barbakow praised Dennis and the AMI merger, stating, "We are going to save $60 million to $70 million a year in economies of scale. You don't need two corporate management structures, and we'll get better terms on purchases and from lenders."

But the bond raters are not turning rosy-checked at the NME buyout of AMI; Moody's dropped its rating on outstanding NME debt to a low B, considered "speculative to low grade."

NME is going to issue about $900 million in new corporate IOUs to finance its payout to AME shareholders, but the market appears receptive. DLJ has issued a "highly confident" letter that it can raise the dough. At NME also, there is expressed confidence (Barbakow was doing a road show last week to sell the deal to analysts and others).

"Judging from the number of investment bankers who have called me this week, I think there are plenty of buyers of the debt," said Barbakow last week. "Placing the debt will not be a problem."

Barbakow and Dennis have been at each other's elbows many a time; it was Barbakow who hired Dennis at Merrill Lynch 15 years ago, and then Dennis who helped draw Barbakow into DLJ's fold a few years back when Barbakow left MGM. Barbakow left DLJ in June 1993, when the hospital chain was embroiled in federal and state prosecution regarding admissions and billings at its psychiatric hospitals.

Since then, Barbakow has settled all suits and inked plans to sell off the offending psychiatric facilities. Wall Street has like NME stock since Barbakow has taken over, and about doubled its trading price.

"Obviously, I have leanings towards Merrill Lynch and DLJ, and I enjoy working with Dennis," said Barbakow last week. "I know his strengths, and he has been working in the health care industry for a long time."