Fresenius Medical Care, the world's top dialysis company, unveiled a $3.5-billion buy of Renal Care Group Inc on Wednesday, helping it overtake DaVita in the key US market. But FMC's ordinary stock fell 4 percent on fears the company had overpaid, raising its indebtedness. Investors also switched to its preference shares after FMC said it would convert them into ordinary stock at a discount. FMC will pay $48 per share in cash for shares of Nashville, Tennessee-based Renal Care, a deal it said would be neutral to slightly accretive to earnings in 2006 and clearly accretive in 2007 and beyond as it boosts its number of kidney dialysis clinics.
"Renal is a very attractive target with high profitability, but FMC's price assigns a very high value to it," said Landesbank Rheinland-Pfalz analyst Alexander Groschke.
"Renal has been valued at 16 times enterprise value to EBIT, which is higher in those terms than FMC's value, and this is bound to lead to volatility in FMC shares today," he said.
The acquisition, which FMC expects to close in the second half of the year, will create a group with revenues of $7.5 billion, widening FMC's lead over Sweden's Gambro and DaVita as the world's top dialysis player.
The price of $48 a share represents a premium of 22 percent over Tuesday's closing price for Renal Care.
FMC also said it would convert its preference stock into ordinary shares at about a 10 percent discount to Tuesday's closing price.
FMC ordinary stock was down 4.1 percent at 59.87 euros by 1140 GMT, underperforming a 0.3-percent fall in the DAX index. The preference share rose 6.4 percent to 47.5 euros.
Traders said bonds issued by the group also fell 3 to 5 points on news of the acquisition and were quoted at around 106 percent of face value.
"It's going to have a very significant impact on their leverage," said a trader in London. "You're probably looking at a weak double-B entity."
FMC is currently rated at BB+ by Standard & Poor's, the highest rating in the speculative grade category.
"We expect to reduce leverage fairly quickly over the next couple of years using the strong cash flows of the combined company," Lawrence Rosen, FMC's finance head, told a news conference.
"It's difficult to predict, but we expect to remain in the double-B range for the credit rating."
Renal Care had sales of around $1.35 billion in 2004, with operating earnings of $254 million. It operated 425 clinics with 30,400 patients. The new group will treat more than 156,000 patients a year at 2,000 dialysis clinics world-wide.
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