DaVita to Buy HealthCare Partners

Earlier this week, DaVita Inc. (DVA - Analyst Report) announced that it has entered into an agreement to purchase HealthCare Partners, one of the largest operators of medical groups and physician networks in the U.S., for about $4.42 billion. The transaction amount comprises $3.66 billion in cash and about 9.38 million shares of DaVita.

However, the purchase consideration is subject to post-close adjustments and contingent consideration. Moreover, the shareholders of HealthCare Partners will get an additional $275 million on achieving certain performance targets by the company in 2012 and 2013. DaVita is expected to borrow funds to finance the acquisition, apart from using its free cash balance and senior secured credit facility.

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 regulatory authorities and owners of HealthCare Partners, apart from other customary closing conditions. JPMorgan Chase & Co. (JPM - Analyst Report) acted as DaVita's financial advisor for the deal.

HealthCare Partners operates primarily in the Southern California, Central Florida and Southern Nevada regions. The company provides primary care and specialty physician services as well as hospital and other healthcare services.

HealthCare Partners covers the health care needs of almost 667,000 managed care patients. However, the company has a much smaller operating scale compared to DaVita, with revenues of approximately $2.4 billion in 2011 versus DaVita’s revenue of $6.98 billion.

Following the announcement, Standard & Poor’s Rating Services affirmed the corporate credit rating of DaVita at “BB-” and the debt rating on its senior unsecured debt at “B.” However, the rating agency placed the “BB” credit rating on the company’s senior secured debt on CreditWatch with negative implications.

Another rating agency, Fitch ratings also affirmed the “BB-” issuer default rating on DaVita. The rating agency also affirmed the company’s senior secured bank credit facility rating of “BB” and senior unsecured notes rating of “BB-” with a stable outlook.

DaVita frequently acquires companies both domestically as well as internationally in order to expand its business. However, recently the company has been focusing more on international expansion.

In April 2012, DaVita announced the purchase of a controlling interest in a Saudi Arabian kidney care company - Lehbi Care. Earlier, in March 2012, the company announced a joint venture with 3SBio Inc. (SSRX), a China-based biotechnology company, to jointly invest about $20 million in China.

DaVita currently caries a Zacks #3 Rank, implying a short-term Hold rating.