National Medical Enterprises said Tuesday that it will acquire rival hospital chain American Medical Holdings in a $3.3-billion deal that would nearly double its size and strengthen its presence in the key Southern California and southern Florida markets.
With the hospital industry undergoing a massive restructuring, National Medical's acquisition would ensure that the Santa Monica company--now the nation's second-largest health care firm--remains a significant player, analysts and company executives said.
It would also increase the likelihood that National Medical, which was likely to be swallowed by a competitor if it didn't strike first, can remain independent.
However, the deal is not quite the blockbuster that National Medical Chairman Jeffrey Barbakow had set his sights on.
Barbakow tried to negotiate a complicated three-way merger with Dallas-based American Medical and HealthTrust Inc. of Nashville. If completed, it would have transformed National Medical into a health care giant nearly equal in size to Columbia/HCA Healthcare Corp., the nation's largest health care concern.
But Columbia/HCA, based in Louisville, Ky., quashed Barbakow's plan a week ago when it bid $3.4 billion for HealthTrust.
Instead of becoming a national force almost overnight, National Medical will have to settle for becoming a bigger player in specific U.S. markets. Besides California and Florida, the American Medical deal would also give the firm a strong presence in New Orleans and Texas.
"We will never be the biggest health care company in the United States; that is not our goal," Barbakow said. "We will try to improve our position in the markets we serve."
The new company would have $5.3 billion in combined revenue and 84 hospitals in 13 states and overseas.
Among the hospitals to join under one roof would be four Orange County facilities with a total of 639 beds and 2,180 employees. The cost savings in the merger would come mainly at the corporate level, and layoffs will occur there, not at any of the hospitals, said NME spokeswoman Diana Takzam.
Barbakow called the American Medical deal "the very best transaction" available to the company and said more acquisitions are likely.
"You'll see a lot of deals quickly," he said, adding that they will probably include acquisitions of one or two hospitals in certain markets. He said the company will look closely at possible acquisition of nonprofit hospitals, many of which are struggling financially in an era of medical cost cutting.
But Barbakow said the company is also exploring some larger hospital acquisitions, though most of the biggest chains have been snatched up in other mergers. One exception is Nashville-based OrNda Healthcorp., a 48-hospital chain with a strong presence in California, which some analysts have suggested as a good match for National Medical. Barbakow wouldn't comment on any discussions with OrNda.
Analysts had mixed reactions to the deal.
Jeff Villwock of Johnson Rice & Co. in New Orleans praised the deal as "a tremendous operating merger" with "a lot of synergies."
But Dean Witter Reynolds' Todd Richter said National Medical's move was "one of desperation. Putting NME and American Medical together doesn't get you the critical mass you need to survive in the future."
Barbakow said the merger would allow the company to negotiate better deals with health insurers because of the size and breadth of its facilities in Southern California. It would create especially strong operations in Southern California--which would account for half the combined entity's revenue--and in southern Florida, Louisiana and Texas.
National Medical owns eight hospitals in Southern California, including its Los Angeles flagships, Century City Hospital and USC University Hospital. In Orange County, it runs Los Alamitos Medical Center, with 173 beds and 740 employees, and Placentia Linda Community Hospital, with 114 beds and 325 employees. American Medical operates five hospitals in Southern California, including Garden Grove Hospital and Medical Center and Irvine Medical Center.
"We have a hospital in Century City and now we have ones in Tarzana and Encino, plus Orange County," Barbakow said. "We'll have the critical mass to go to the employers in Los Angeles and say, 'We have the following assets and services across Southern California.' "
But one health care executive said National Medical may still not have enough facilities in the huge Los Angeles market to gain the marketplace clout it seeks.
"I haven't seen any HMOs that are willing to sign a contract with one medical system," said Terry Hartshorn, chief executive of UniHealth America, a Burbank-based health care company that owns nine hospitals in Southern California. "This marketplace is so complex and competitive now that 15 hospitals isn't a big enough critical mass to create much of anything."
The $3.3-billion valuation for American Medical includes the assumption of about $1.3 billion in debt by National Medical.