German medical group Fresenius unveiled a $3.7 billion deal to buy U.S. company APP Pharmaceuticals to take control of a key drug used by its dialysis unit.
The agreed takeover, one of the biggest by the healthcare group, sent Fresenius shares tumbling as much as 11 percent as analysts cited a high price and after the company said it would finance part of the deal through a capital increase.
Fresenius owns the biggest worldwide provider of dialysis services, and dominates that market with U.S. rival DaVita .
APP has become the main supplier of the drug heparin after a recall by Baxter International.
Heparin is a vital blood-thinning drug used in patients on dialysis, a procedure to clear the blood of waste that is used mostly in patients with kidney disease.
By taking control of APP, Fresenius could curb the rise in heparin's price, Oppenheimer analyst Balaji Gandhi said.
"DaVita could ride the coattails" of that price moderation, he added.
APP shareholders will receive $23 a share in cash, a 29 percent premium to the stock's last closing price, valuing APP at $3.7 billion, the companies said on Monday.
They could get a further $6 a share in the second quarter of 2011 if APP beats a core profit target.
Fresenius will also take on APP's net debt of about $940 million, APP added.
Fresenius stock was 9.3 percent lower at one point, but recovered losses to close 0.2 percent higher at 36.28 euros on the German DAX.
APP soared 32 percent, or $5.68 to $23.52 on Nasdaq.
APP, based in Schaumburg, Illinois, sells injectable generic drugs for dialysis, cancer, pain and critical care management in the United States and Canada. It has about 1,400 staff.
The company had 2007 sales of $647 million and adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $253 million.
It is forecasting 2008 sales of $730 million to $750 million and adjusted EBITDA of $285 million to $300 million.
The takeover will have no overall impact on earnings per share in the first year but will clearly boost earnings from the second year going forward, Fresenius said.
It expects to close the deal at the end of 2008 or start of 2009.
APP will become a part of Fresenius' Kabi unit, its infusion drug therapy and nutrition division.
"With the APP platform, Fresenius Kabi will be able to market its product range in the U.S. Fresenius Kabi's international marketing and sales network will allow us to sell APP's products globally," Fresenius Chief Executive Ulf Schneider said.
Fresenius plans to finance the purchase with a mix of debt and equity aimed at minimising the impact on Fresenius SE's credit ratings, with the largest portion through debt.
It will assume all of APP's outstanding debt, now about $940 million net of cash.
Fitch Ratings changed its outlook on Fresenius to negative from stable and affirmed its ratings following the announcement.
"Although the acquisition causes a temporary deterioration in Fresenius's debt protection measures in the short term, it is slightly positive for its business profile by adding a high-margin business with good sales growth potential," Fitch analyst Britta Holt wrote.
Finance chief Stephan Sturm said the company planned a capital increase to cover a minority of the transaction.
More details about the financing would be revealed in coming weeks.
Financing commitments for the total amount had been received from Deutsche Bank, Credit Suisse and JPMorgan, Fresenius said.
The deal had been approved by APP's board of directors but still needs approval from regulators.
Patrick Soon-Shiong, APP founder and holder of over 80 percent of the outstanding stock, had given his written consent and a voting agreement, APP said.
Fresenius added that it would not list its Fresenius Kabi unit separately on the stock exchange and said it would be more cautious in approaching further acquisitions after APP.