NME Seeks to Buy Chains in Bid to Become Hospital Giant : Health care: A successful merger would allow National Medical Enterprises to overcome a major scandal.
Santa Monica-based National Medical Enterprises is negotiating to buy two regional hospital chains in an effort to become the nation’s second-largest hospital operator, sources said Tuesday.
If NME succeeds in acquiring Nashville-based HealthTrust Inc. and American Medical Holdings of Dallas, it would increase its hospital properties more than five-fold--gaining strong operations in the key states of Florida and Texas--and cap a dramatic recovery from the scandal that plagued the firm for most of the past two years.
Three months ago, NME made headlines when it agreed to pay $380 million to settle federal criminal charges in the largest health care fraud payment in U.S history.
A merger of NME with HealthTrust and American Medical would create a giant health care company with $10 billion in annual revenue and about 200 hospitals in the United States and several foreign countries. It would be second in size to Columbia-HCA Healthcare Corp., in terms of revenue.
Executives of the three companies declined to confirm or deny the negotiations, which were first reported Tuesday in the Wall Street Journal. The Journal article was based on different drafts of a speech being prepared for NME Chairman Jeffrey Barbakow in preparation for the firm’s annual shareholders meeting on Sept. 28.
An NME spokeswoman read a statement that said the firm “has had conversation with many companies related to a variety of possible corporation transactions.”
Robert W. O’Leary, chairman and chief executive of American Medical, said in a statement that his firm “has not reached agreement to acquire, merge with or be acquired by any other organization.”
A source close to the companies said negotiations between NME and American Medical had not yet reached their final stage and that the deal could still unravel.
“Rumors of this kind are very prevalent at this time,” said a spokeswoman for HealthTrust.
In New York Stock Exchange trading, NME shares on Tuesday fell $1 to $17.75, while American Medical added 25 cents to $23.25 and HealthTrust rose 87.5 cents to $30.875.
Based on Tuesday’s closing prices, HealthTrust’s total market value is $2.59 billion and the total capitalization for American Medical is $1.8 billion.
Some analysts said the deal makes sense for the hospital companies, which, like the rest of the industry, are facing increasing pressure from employers and insurers to reduce costs. The hospital industry has seen a flurry of mergers and other deals in the past year.
Geoffrey Harris, analyst at Smith Barney, Harris Upham & Co. in New York, said the NME acquisitions look like “a smart deal.”
“There’s a lot of talent at the three companies,” he said. “AMI management is terrific as cost-cutters; HealthTrust is a good system integrator; NME is a good hospital operator and Barbakow is skilled at deal making and the financial side.”
By combining operations, Harris said, the three companies should be able to cut administrative costs and achieve other efficiencies, particularly in local markets where they operate several health care facilities. Also, many insurers prefer dealing with a smaller number of providers in a particular market.
HealthTrust and American Medical already have experience working together through a joint venture formed in 1992 when the AMI-owned Tarzana Medical Center united with HealthTrust’s Encino Hospital to form Encino-Tarzana Regional Medical Center.
Barbakow has said previously that mergers or acquisitions were one of several strategies the company might pursue to prosper in the fast-changing health care environment. Analysts have speculated that NME was a likely takeover target.
In an employee newsletter earlier this month, Barbakow said NME has received no serious offers from companies interested in acquiring the firm. He also told employees that buying back its own stock was not the best way for NME to enhance investors’ returns.
Barbakow wrote that acquiring other acute-care hospitals seemed like the firm’s best strategy. “Given the scope and rapidity of consolidations in the industry, acquiring single facilities is probably too slow a process to be a successful long-term strategy. It would be preferable to make larger acquisitions of multifacility providers,” he said.
HealthTrust is by far the largest of the three companies, with 118 hospitals, including five in California. About 60% of its hospitals are in small communities with only one or two acute-care hospitals.
National Medical operates 33 acute-care hospitals in six states and 13 others in Australia, Malaysia, Singapore and Spain.
