Business Context and Reporting Period
This Form 8-K Current Report, dated October 4, 2005, details material events for DaVita Inc. occurring on October 5 and 6, 2005. The primary events include the completion of the acquisition of Gambro Healthcare, Inc. for $3.05 billion, the entry into a new senior secured credit facility, and the divestiture of 70 dialysis centers to satisfy Federal Trade Commission (FTC) requirements.
Key Financial Metrics and Agreements
- Acquisition Cost: Total purchase price of $3.05 billion, consisting of approximately $1.8 billion in cash and the assumption of $1.25 billion in indebtedness (mostly inter-company).
- Debt Financing: Established new credit facilities totaling $3.05 billion:
- $250 million six-year revolving credit facility.
- $350 million six-year term loan A facility.
- $2,450 million seven-year term loan B facility.
- Initial Borrowings: As of October 5, 2005, the company borrowed $2.8 billion in term loans and $50 million under the revolving facility to fund the acquisition and related fees.
- Divestiture Proceeds: Expected aggregate cash consideration of approximately $328 million from the sale of 70 freestanding renal dialysis centers to Renal Advantage Inc.
- Product Supply Commitment: Entered a seven-year Alliance and Product Supply Agreement with Gambro Renal Products to purchase a significant majority of hemodialysis products. Historical spending on these items was less than 8% of total operating costs (2004).
Material Changes and Transactions
The filing reports a significant expansion of the company's asset base and debt load. DaVita acquired Gambro Healthcare, simultaneously repaying the target's inter-company indebtedness. To fund this, the company terminated its previous credit agreement and replaced it with the new $3.05 billion facility. Concurrently, to comply with an FTC Consent Order, the company divested 70 outpatient dialysis centers (with three additional centers pending regulatory approval) to Renal Advantage Inc. and terminated two management services agreements.
Outlook, Risks, and Contingencies
- Tax Contingency: If DaVita elects a Section 338(h)(10) tax treatment for the acquisition, it estimates an additional cash payment to Gambro of approximately $150 million to $170 million.
- Covenants: The new Credit Agreement includes financial covenants requiring quarterly compliance with leverage and interest coverage ratios. It also mandates the use of net cash proceeds from asset sales, debt financings, and securitizations to prepay debt.
- Regulatory Compliance: The divestiture of 68 centers was mandated by the FTC to close the acquisition. Three additional centers remain pending Illinois state regulatory approval, expected within 60 days.
- Employee Compensation: Approved a Voluntary Deferral Plan for eligible employees and a specific retention bonus of $125,000 annually for four years for Group Vice President Thomas O. Usilton, Jr.
Investor Verification Checklist
- Verify the final closing date and regulatory approval status for the remaining three divested centers.
- Confirm whether the company will make the Section 338(h)(10) tax election, which would trigger an additional $150-$170 million cash outflow.
- Review the upcoming Form 10-Q for the full text of the Credit Agreement, Security Agreement, and Supplemental Indentures to understand specific covenant thresholds.
- Monitor the company's ability to meet the new leverage and interest coverage ratios under the $3.05 billion debt load.
- Assess the impact of the new supply agreement on future cost structures, noting the commitment to purchase a significant majority of products from Gambro.