Baxter to buy Sweden's Gambro for $4 billion

Wed Dec 5, 2012 4:46am IST

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(Reuters) - Baxter International Inc said on Tuesday it would buy privately held Swedish kidney dialysis product company Gambro AB for about $4 billion, a tie-up that would make it No. 2 in the dialysis market.

Baxter, whose shares fell nearly 1 percent, will finance the acquisition with cash and debt. The deal marks Baxter's biggest acquisition since Chief Executive Robert Parkinson took the helm in 2004.

Baxter manufactures kidney dialysis equipment, drug infusion pumps and blood therapy products. The Gambro acquisition will round out Baxter's renal business, which accounted for almost one-fifth of the company's 2011 revenue of $13.89 billion.

Gambro, based in Lund, Sweden, is one of the largest makers of equipment for hemodialysis, which is generally performed in a hospital or clinic. Baxter's machines are used for peritoneal dialysis which can be done at home.

The need for dialysis is linked to the epidemic of obesity and diabetes and is attracting more investors. Billionaire Warren Buffett has more than a 10 percent stake in competitor DaVita HealthCare Partners Inc.

Gambro's sales have been flat to weaker in recent years, undermined partly by capacity constraints, but Baxter executives voiced confidence during a conference call with analysts that the business can be turned around.

"It is a big market and it is going to continue to grow for a long time. There are only so many kidney transplants available in the world," Parkinson told analysts.

Hemodialysis removes waste products from the blood when the kidneys fail. Another method is peritoneal dialysis, a treatment for severe chronic kidney disease that uses the patient's own membrane inside the body as a filter to clear waste. The third treatment option is a kidney transplant.

"At the end of the day, this is an acquisition that is not dependent on any one pathway for value creation. It is not dependent on a major new product launch or technological advancement, and is not dependent on commercial assumptions that are overly optimistic. This is an acquisition that is dependent on execution," he said. "This is something we know we can do and do well."

He said the planned acquisition did not represent a change in the direction for the company, which has invested in stem cell research and a treatment for Alzheimer's disease.

Shares of Baxter fell 0.9 percent to $65.22 on Tuesday on the New York Stock Exchange.

TOO PRICEY?

Some analysts said they were concerned by the price tag and that the company said on its conference call it will issue $3 billion in new debt and scale back its share buyback program in order to acquire Gambro.

"I think the deal makes sense. I think it does fit well with their existing renal business and I think there probably are synergies, but at the same time it is a lot of cash they are paying for this thing. They are taking on a significant amount of debt," said Michael Matson, an analyst at Mizuho Securities USA.

Credit rating agency Moody's said it put Baxter's A3 rating on review for downgrade following the announcement.

Derrick Sung, an analyst with Bernstein Research, noted that Baxter will be paying 2.5 times sales, which is not "unreasonable" but appears to be on the high end of comparable deals.

The Gambro deal marks further consolidation in the kidney dialysis market, where Gambro and Baxter compete against companies including U.S.-based DaVita and Germany's Fresenius Medical Care AG & Co KGaA, the biggest player in the hemodialysis market.

"I think in the longer term, the ambition is to try to challenge Fresenius," currently the market leader, analyst Kristofer Liljeberg of Sweden's Carnegie investment bank said.

However, he said that Gambro, owned by Swedish investment holding company Investor AB and its partly owned private equity company EQT, had been struggling in recent years with slow growth and price competition.

Liljeberg said the deal was a good one for Investor, the investment vehicle of the Wallenberg family which controls several of Sweden's top companies. Since the purchase of Gambro, Investor and EQT have sold off its clinics and a blood component business.

"This is a good long-term home for Gambro," Borje Ekholm, CEO of Investor, said. "These two companies have a lot of things in common. They share similar values to improve the lives of patients. They have a very complementary geographic fit."

A GROWING MARKET

More than 2 million patients globally are on some form of dialysis, and that has been increasing more than 5 percent annually, in part because of the rising rates of diabetes and hypertension.

Excluding special items, Baxter expects the Gambro transaction to reduce earnings per diluted share by 10 to 15 cents in 2013 and be neutral or add modestly to them in 2014. The deal is expected to close in the first half of next year.

Excluding the impact of special items and estimated amortization of intangible assets, the company said the deal should not affect earnings in 2013 and should add 20 to 25 cents per diluted share in 2014.

Baxter said it expected the deal to add to earnings per diluted share, excluding special items, after 2014.

The suburban Chicago company said it expected over five years to increase sales by 7 to 8 percent, excluding the impact of currency fluctuations, on a compound annual basis, with earnings per diluted share, excluding special items, rising by 8 to 10 percent.

"Companies like Baxter can unlock a fair amount of value when they find strategic use for their overseas cash," said Piper Jaffray analyst Matt Miksic.

Indeed, Baxter said it planned to finance the deal with cash generated from overseas operations and debt.

J.P. Morgan was Baxter's financial adviser for the deal while Goldman Sachs advised Gambro.

(Reporting by Esha Dey in Bangalore, Debra Sherman in Chicago, Caroline Humer in New York, and Patrick Lannin and Mia Shanley in Stockholm; editing by Joyjeet Das, Lisa Von Ahn, Matthew Lewis, Marguerita Choy and Phil Berlowitz)

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