When real news fade, rumors seem to crop up a little more readily. In the case of the rumor that Baxter (NYSE:BAX) is arranging a bid for Gambro, however, there's a little more credibility than usual. Baxter has long wanted Gambro, and the combination would make sense in a med-tech market where growth is increasingly hard to come by.
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The Deal That May Be
Financial reporters are consistently reporting (or repeating) that Baxter is preparing a bid worth approximately $4 billion for Gambro. One of the largest players in hemodialysis, Gambro has been private for about six years now, co-owned by two Nordic private equity groups (Investor AB and EQT). While Gambro was taken private for over $5 billion, Investor AB and EQT have since sold off some of Gambro's business units, including the $2.6 billion sale of Caridian BCT to Terumo in 2011.
As Gambro's owners feel no particular need to discuss the financial performance at Gambro, and the company has sold some of its businesses over the years, estimating the value of this deal requires a little guesswork. Based on what rivals such as Baxter and Fresenius (NYSE:FMS) have said about the global hemodialysis business, I would estimate that this deal would represent a premium of between 2.5 times and 3 times for Gambro's hemodialysis business.
I do not know whether the private equity owners would be interested in taking Baxter shares as payment. Assuming not, Baxter would need to raise at least $1 billion in debt financing. Not only is that not a terribly onerous funding requirement, but the deal for Gambro would also likely be a good use of cash that Baxter currently has overseas.
SEE: A Primer On Private Equity
What Baxter Is Getting
While Baxter generates about 20% of its revenue from its renal business, the company has a modest position in hemodialysis. Instead, the company has a large share of the global peritoneal dialysis market. Although changes to Medicare reimbursement have given peritoneal dialysis a better footing relative to hemodialysis, the fact remains that many patients ultimately have to transition to hemodialysis.
Gambro is the number two global player in the hemodialysis equipment market. Fresenius likely has more than half of the market for dialysis machines (with even greater share in the U.S.), and close to 40% share for all hemodialysis products. By comparison, Gambro likely has close to 20% share of the global hemodialysis product market, and somewhat higher share in machines and dialyzers. Other competitors of note include B.Braun and Nipro. In buying Gambro, then, Baxter should be not only expanding its presence in a worthwhile market in its own right, but also better leveraging its existing peritoneal dialysis business.
As a quick review for those not familiar with the market, end-stage renal disease (ESRD) affects roughly 2 million people worldwide (and more than a half million in the U.S.). ESRD can often be tied to diabetes, heart disease and obesity, and although national healthcare systems have worked hard to control reimbursement spending on dialysis, it has been a steady growth market.
What the Deal Could Mean
Assuming this deal happens, it stands to reason that Baxter will look to support Gambro with the R&D and marketing dollars it needs to compete with Fresenius. I would particularly expect to see Baxter work to challenge Fresenius' leading share for hemodialysis hardware in North America. Accordingly, I don't see a more motivated (and likely more aggressive) owner of Gambro as a positive development for Fresenius.
Likewise, I could see investors in NxStage Medical (Nasdaq:NXTM) being disappointed that Baxter elected to make a major purchase in the established in-center hemodialysis equipment market. This deal for Gambro (if it proves true) wouldn't preclude a later deal for NxStage, but neither Fresenius nor Baxter seem all that focused on home hemodialysis at present (particularly with Baxter's large peritoneal dialysis business). It's also worth noting that Gambro is a major distributor for NxStage in the in-center market.
For other pump and infusion companies like CareFusion (NYSE:CFN) and Hospira (NYSE:HSP) this deal could be a slight positive - if Baxter management is tied up and distracted by the acquisition and integration of Gambro, it could give them a little extra (albeit temporary) breathing space.
SEE: Analyzing An Acquisition Announcement
The Bottom Line
If my estimates are accurate and Baxter is paying less than 3 times revenue for Gambro, it's a fairly solid deal for the company. As I said, I do believe it should enhance the value of the peritoneal dialysis business. What's more, while companies such as Fresenius and Davita (NYSE:DVA) are under seemingly endless reimbursement pressure for dialysis service, the demand for equipment is not under similar pressures. What's more, as health care spending increases in emerging market countries, and lifestyle diseases such as diabetes become more common, dialysis hardware demand should increase.
My primary objection to Baxter is that the shares seldom get very cheap, absent the occasional worries over product recalls and/or reimbursement. At today's prices, I don't see Baxter as much of a bargain, but I would be in no rush to sell my shares were I an owner.
At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.
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