Epic Healthcare Sues AMI Over Merger Plans

Epic Healthcare Group has sued American Medical International, alleging that the Beverly Hills hospital management firm may avoid meeting certain financial obligations by proceeding with a planned merger.

The suit, filed Thursday, seeks at least $200 million in punitive damages for alleged fraud surrounding AMI’s July 6 agreement to be acquired by an investor group led by First Boston and a company financed by Chicago’s Pritzker family. The $1.9-billion deal is scheduled to be completed Sept. 27.

If the sale is completed, the suit claims, AMI would be unable to assume responsibility for any tax obligations and legal claims against 36 former AMI hospitals before they were sold to Epic last year for $830 million. The suit said AMI agreed to assume such responsibility before Dallas-based Epic acquired the hospitals.

Fraud Claimed

The planned sale of AMI, the suit charges, “will render AMI’s assets beyond the reach of any claims asserted by Epic pursuant to the indemnity agreement by burdening AMI with more than $2.4 billion of debt, liens on all of its assets and substantial and oppressive interest payment obligations. . . . The (sale) will be consummated with actual intent to defraud Epic . . . or will render AMI unable to pay its debts as they become due.”

In addition to punitive damages, the suit asks the court to freeze an unspecified amount of AMI’s assets to ensure that the company meets financial obligations related to any lawsuits or tax liabilities.

AMI, now composed of 77 health-care facilities worldwide, said it will contest the suit.

“It is utterly without merit,” said Suzanne Hovdey, spokeswoman for AMI, adding that the suit would not upset AMI’s merger plans.

Some industry analysts said AMI and Epic will probably negotiate any differences.

“I think this is something that can--and should--be dealt with quickly,” said Rae Alperstein, a securities analyst at Bateman Eichler, Hill Richards in Los Angeles.

However, Alperstein said the suit created some uncertainty about the merger, slightly dampening interest in AMI stock. AMI shares closed Monday at $24.125, down 25 cents, on the New York Stock Exchange. Alperstein said some traders are responding to rumors that the acquisition price may be renegotiated.

Not Unexpected

“There’s nervousness over when this (merger) will be done,” Alperstein said.

Another analyst, Kenneth Abramowitz of Sanford C. Bernstein & Co., said the lawsuit was not unexpected. He said Epic filed the suit to get stronger financial guarantees from AMI. Abramowitz said Epic would not have as much negotiating leverage if it waited until a merger was completed.

“This is commonplace,” he said. “This is when plaintiffs have the most negotiating power.”

In another development, AMI said Monday that it has reached a definitive agreement to sell its 64% interest in Professional Healthcare Systems, a management services subsidiary, to the employees of that operation. PHS provides computerized programs for payroll and accounting services to AMI facilities and 80 other hospitals.