Business Context and Reporting Period
This Form 8-K, dated May 20, 2012, reports that DaVita Inc. has entered into a definitive agreement to acquire HealthCare Partners Holdings, LLC ("HCP"). The transaction involves a merger of a DaVita subsidiary with HCP, with HCP surviving as the entity.
Key Financial Metrics and Transaction Terms
- Total Merger Consideration: $3.66 billion in cash and 9,380,312 shares of DaVita common stock.
- Payment Structure: HCP members may elect to receive cash, stock, or a combination, subject to an overall cap on the total cash and stock issued.
- Working Capital Adjustment: The consideration is subject to customary adjustments for working capital.
- Financing: The cash portion is expected to be funded via available cash, borrowings under amended senior secured credit facilities, and additional debt financing.
- Escrow: $559,375,000 of the consideration will be held in escrow to secure indemnification obligations and working capital adjustments, with final release scheduled for October 15, 2017.
- Reverse Termination Fee: DaVita must pay HCP $125,000,000 if the deal fails to close by November 30, 2012, or if DaVita breaches the agreement.
Material Changes and Earn-Out Provisions
In addition to the base consideration, the agreement includes an earn-out mechanism totaling up to $275,000,000 in cash, contingent on HCP's future performance:
- 2012 Target: If Earn-Out EBITDA for the fiscal year ended December 31, 2012, is at least $550,000,000, DaVita will pay $137,500,000.
- 2013 Target: If Earn-Out EBITDA for the fiscal year ended December 31, 2013, is at least $600,000,000, DaVita will pay an additional $137,500,000 (subject to a potential reduction of up to $10,000,000).
Management Commentary and Governance
Upon closing, Dr. Robert Margolis, CEO of HCP, will be appointed to the DaVita Board of Directors. His re-nomination for the next four annual meetings will be assessed in the same manner as incumbent directors. Key HCP executives have entered into support agreements, agreeing to vote in favor of the merger and accepting sale restrictions on DaVita stock received in the transaction (no sales for two years, followed by staggered release).
Risks and Contingencies
- Financing Risk: No assurance is given that additional debt financing will be available on acceptable terms or at all.
- Regulatory Approval: Closing is subject to the expiration of the Hart-Scott-Rodino waiting period and SEC effectiveness of the Form S-4 registration statement.
- Member Approval: While HCP Medical Group (holding ~72% of units) has agreed to vote in favor, the transaction requires approval by a majority of HCP members.
Investor Verification Checklist
- Verify the availability and terms of the additional debt financing required to fund the $3.66 billion cash portion.
- Monitor the filing and effectiveness of the Form S-4 registration statement.
- Confirm the status of the Hart-Scott-Rodino antitrust review period.
- Review the final working capital adjustment calculation at closing.
- Assess the likelihood of HCP meeting the 2012 and 2013 EBITDA targets to trigger the $275 million earn-out.