DaVita Inc.
(
DVA
) has decided to price its recently announced senior notes due
2022, which are being issued for part payment for HealthCare
Partners' acquisition, at a premium of 25%. Consequently, the
company will issue the $1 billion worth of notes at $1.25 billion,
with an interest rate of 5.75%. The issuance is expected to be
completed by August 28, 2012, subject to customary closing
conditions.
Following the announcement, credit rating agency Moody's
assigned a "B2" rating to DaVita's senior notes. Standard and
Poor's (S&P) also assigned a "B" rating to the notes with a
recovery rating of "6". This indicates that the chances of recovery
of the principal, in case of default, lie between 0%-10%. According
to S&P, this is almost negligible. Additionally, S&P
affirmed its corporate credit rating (CCR) on the company at "BB-"
with a stable outlook and stated that the CCR will not be affected
by the issue.
The proposed issue will increase DaVita's interest by $57.5
million annually, which will weigh on its already high expenses.
Nevertheless, the company has strong cash flows and a sturdy
balance sheet, which will help it to absorb the surge in expenses.
However, the issuance of notes will increase the company's total
debt to $5.39 billion from $4.39 billion as of June 30, 2012,
thereby deteriorating its financial leverage.
DaVita had announced the issuance of these senior notes for the
$4.42 billion acquisition of HealthCare Partners, one of the
largest operators of medical groups and physician networks in the
U.S., earlier this week. The company will finance the remaining
part of the purchase consideration from borrowings made under its
amended senior secured credit facility and cash balance.
Further, DaVita will use the residual portion of the borrowing
under the amended senior secured credit facility and cash balance
to pay off a $198.5 million Term Loan A-2 outstanding under the
existing senior secured credit agreement. The amount will be
further used to repay HealthCare Partners' existing indebtedness
and to pay the fees and expenses associated with the
acquisition.
Moreover, if the acquisition fails to reach completion by the
end of November 2012 or the merger agreement is terminated prior to
the closure, DaVita will redeem all the senior notes. However, the
company retains the right to extend the date of completion of the
acquisition under certain situations.
DaVita announced the agreement to purchase HealthCare Partners
in May 2012. The transaction amount comprises $3.66 billion in cash
and about 9.38 million shares of DaVita. Moreover, the shareholders
of HealthCare Partners will get an additional $275 million, if the
company achieves certain performance targets in 2012 and 2013.
Post acquisition, the merged company will operate under the name
DaVita HealthCare Partners Inc., although HealthCare Partners will
operate as a subsidiary of the umbrella company. The acquisition is
expected to be completed in the fourth quarter of 2012, subject to
approval of the regulatory authorities and owners of HealthCare
Partners, apart form other customary closing conditions.
JPMorgan Chase & Co.
(
JPM
) acted as DaVita's financial advisor for the deal.
DaVita currently carries a Zacks #3 Rank, implying a short-term
Hold rating. We maintain a long-term 'Neutral' recommendation on
the shares.
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