Chicago Firm Bids $1.7 Billion to Buy Out AMI : Follows Takeover Rumors and First Annual Loss by Southland Hospital Chain

A Chicago-based health care conglomerate on Tuesday offered $1.74 billion cash to buy American Medical International--the Beverly Hills-based owner of 95 for-profit hospitals across the country.

The nation’s second-largest hospital management company when ranked by revenue, AMI received the $20-a-share offer from Alpha Health Systems Corp, a wholly owned subsidiary of Pesch and Co.

AMI, which reported its first yearly loss in 1986, has been buffeted by takeover rumors for more than a year. Earlier this year, Universal Health Services Inc., which held a 4% stake in AMI, queried the company about a takeover offer but was rebuffed. Analysts say that Universal has sold its 4% stake to Pesch.

Neither Pesch officials nor Universal could be reached for comment. AMI Vice President Peter Dowd said Pesch “has apparently acquired some shares, but we don’t know how much.” AMI President and Chief Executive Walter L. Weisman declined to comment on the offer.

Cost-Cutting Crunch

AMI has outstanding about 86.9 million shares of common stock. The bid pushed American Medical’s stock price up $1.375, to $19.25. Its shares were the fourth most actively traded on the New York Stock Exchange.

Pesch’s offer, which will remain open until Feb. 17, comes at a time large hospital management companies have been reeling from industry cost-cutting measures introduced in response to federal efforts to hold down health care costs.

AMI, despite laying off more than 2,000 employees and paring everything from overnight mail to office space, found it especially difficult adjusting to a more frugal Medicare reimbursement system, which on average furnishes about 40% of hospitals’ revenue.

In the fiscal year ended Aug. 31, 1986, for example, AMI reported an annual loss of $97.3 million. In fiscal 1985, the company had net income of $163.8 million.

Spending to Expand

Despite bad financial news throughout the industry, Pesch, which owns or manages about 90 hospitals and is headed by 55-year-old Chicago physician LeRoy A. Pesch, has been on a spending spree to enlarge its presence in the health care industry.

In August, 1986, the company acquired a majority stake in Republic Health Corp., which went private in a buyout valued at $835 million.

Analysts on Tuesday predicted that American Medical’s board would reject Pesch’s latest move.

“I think AMI is going to reject the bid,” said Randall Huyser, a health care industry analyst with Montgomery Securities in San Francisco. “I’m sure they have some kind of contingency plan to do their own buyout, if it comes to that.”

A spokesman for AMI declined to comment on the offer, saying: “We haven’t seen the offer yet.”

Pesch and Co. is a privately held company with interests in health care, information systems and real estate development. Chairman Pesch is the son-in-law of W. Clement Stone of Chicago, the 84-year-old retired multimillionaire insurance magnate.

Pesch said its acquisition of American Medical would be contingent on securing financing--a statement that prompted at least one analyst to question whether Pesch has the financial wherewithal to make good on his offer.

Pesch “knows the industry and knows the company (AMI), . . . but the question is how credible is his offer,” said Thomas M. McGinnis Jr., an analyst for Eberstadt Fleming in New York.

The outcome of the bid, however, could well be determined by AMI’s two largest stockholders: the Bass family of Fort Worth, whom analysts say has accumulated an 11.4% stake in AMI at an average cost of nearly $20 a share, and the Wedge Group of Houston, which has a 5.6% position.

Representatives of the Bass family and the Wedge group could not be reached for comment Tuesday evening. But an AMI official said the company’s two major shareholders have backed management’s plans to improve the company.

AMI Chief Executive Weisman “has been in regular contact with the Bass brothers, briefing them about our plans and progress over the last year,” said AMI’s Dowd. “They have been both interested and supportive of the actions we’ve taken to move AMI forward.”