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Moody's Changes Outlook of Fresenius

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Moody’s Investors Service, the credit rating arm of Moody's Corporation (MCO - Free Report) , has changed its outlook of Fresenius SE & Co. KGaA – the parent company of Fresenius Medical Care (FMS - Free Report) – from positive to negative due to the increase in leverage following the recent acquisition of 43 hospitals from Rhoen-Klinikum AG. The outlook has been downgraded despite the fact that the acquisition will lead to improved coverage of Fresenius SE hospitals across Europe.

Moody's Investors Service has also affirmed the Ba1 corporate family rating, Ba1-PD probability of default rating and the Ba1 unsecured bond)Baa3/(P)Baa3 secured bank instrument ratings for Fresenius SE’s debt issuing finance subsidiaries.
Fresenius’ acquisition of hospitals from private health-care provider Rhoen-Klinikum by its Helios unit is expected to make the company the largest private hospital operator in Europe. Post-acquisition, Fresenius SA will operate 117 hospitals across the continent. Fresenius expects the acquisition of new hospitals, consisting of 11,800 beds and 15 outpatient facilities, to produce synergies leading to a 1%–2% rise in Helios EBITDA margin.

Fresenius will pay €3.07 billion ($4.07 billion) for the Rhoen-Klinikum assets using debt. It anticipates the acquisition to generate annual sales of €2 billion and EBITDA of nearly €250 million. However, the company expects one-time charges of about €80 million before tax due to the acquisition

Later, Helios and Rhoen-Klinikum will also enter a cooperation agreement covering latter’s remaining hospitals. The cooperation will be valued at €40 million, of which, Fresenius will contribute 75% and Rhoen the remaining.

Fresenius Medical Care announced second quarter 2013 adjusted earnings of 44 cents per American Depositary Share (ADS), which was flat year-over-year and lower than the Zacks Consensus Estimate of 46 cents per ADS.

Net revenues grew 5% (6% in terms of constant currency) year over year to $3,613 million in the reported quarter. Revenues marginally missed the Zacks Consensus Estimate of $3,615 million. Organic sales growth was 5% on a global basis.

FMS reaffirmed its revenue forecast for 2013. The company expects sales of over $14,600 million for 2013, up 6% year over year. It raised the upper end of its net income guidance (for shareholders) for 2013 to $1,100–$1,500 million from $1,100–$1,200 million.

Currently, FMS carries a Zacks Rank #3 (Hold). Other medical instruments stocks that are performing well include Delcath Systems, Inc. and Echo Therapeutics, Inc. . Both of them carry a Zacks Rank #2 (Buy).

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