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DaVita Prices Notes, Rating Follows

JPM DVA

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DaVita Inc. (DVA - Analyst Report) 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 - Analyst Report) 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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