Baxter - Investors Applaud The Excellent Addition Of Gambro

| About: Baxter International (BAX)

Shares of Baxter International (BAX) lost 0.9% in Tuesday's little inspiring trading session. The global diversified healthcare company officially announced the acquisition of Gambro for $4 billion in cash. In recent weeks shares of Baxter rose to the highest levels in 2012 as rumors about a possible deal between the companies hit the news wires.

The Deal

Baxter International announced on Tuesday that it has agreed to buy Swedish based Gambro for roughly $4.0 billion, or 26.5 billion SEK in cash.

The deal fits within Baxter's strategy of saving and sustaining human lives. The transaction creates a complementary dialysis portfolio of chronic and acute kidney diseases. The deal allows Baxter to capitalize on attractive global dialysis fundamentals. The global dialysis market grows at a compounded annual growth rate of 5-6%.

Gambro employs 7,500 workers in 13 production facilities across 9 countries.

CEO Robert Parkinson commented on the deal, "At the end of the day, this is an acquisition that is not dependent on any one pathway for value creation. It is not dependent on a major new product launch or technological advancement, and is not dependent on commercial assumptions that are overly optimistic. This is an acquisition that is dependent on execution. This is something we know we can do and do well."

Baxter generated annual sales of $1.6 billion for its annual year of 2011. The majority of sales were achieved in the European region and the company has a strong Asian market position as well. The $4.0 billion all-cash deal values the firm at roughly 2.9 times annual revenues.

Both companies will try to leverage their product offerings across different regions, and leverage sales channels. As such, Baxter aims to achieve annual cost synergies of $300 million by 2017. The deal will be dilutive to 2013 earnings by an estimated $0.10-$0.15 per diluted share, and will be neutral to accretive to 2014s annual earnings per share.

The Board of Directors have approved the transaction. The deal is expected to close in the first half of 2013 and is subject to antitrust clearance under the Hart-Scott-Rodina act, and approval of the European Commission.


Baxter ended its third quarter of its fiscal 2012 with $3.2 billion in cash and equivalents. The company operates with $5.9 billion in short and long term debt, for a net debt position of roughly $2.7 billion. The financial position excludes the impact of the acquisition of Gambro.

For the first nine months of 2012, Baxter generated revenues of $10.4 billion. The company net earned $1.83 billion, or $3.29 per diluted share. The company is on track to net earn $2.5 billion, on revenues of $14 billion.

The market currently values Baxter at $35.8 billion. This values the firm at 2.6 times annual revenues and 14-15 times annual earnings.

Baxter pays a quarterly dividend of $0.45 per share, for an annual dividend yield of 2.8%.

Some Historical Perspective

Year to date, shares of Baxter have risen some 32%. Shares started the year around $50 per share and quickly rose to $60 in March. Shares fell back to $50 in the summer, and reached year highs around $69 in recent weeks after the first rumors about a possible deal with Gambro hit the market.

Shares of Baxter fell from all time highs around $72 in 2008 to lows of $40 in 2010. Shares recovered from that point in time and rose to current levels around $65 per share, in sight of all time highs. Between 2008 and 2012, revenues grew from $12.3 billion to an estimated $14 billion. Net income rose from $2.0 billion to an estimated $2.5 billion. Earnings per share growth was even more spectacular as Baxter retired 15% of its shares outstanding.

Investment Thesis

When the first rumors about a possible deal hit the market near the end of November, shares rose to all time highs. The $4 billion deal will make the company the second largest player in the worldwide dialysis market. The $4 billion deal will be financed with $1 billion in cash at hand and the remainder in debt. The net debt position will increase to an estimated $6.7 billion as a result of the deal.

The deal valued at 2.9 times annual revenues is in line with Baxter's own valuation of 2.6 times annual revenues. The deal will boost annual revenues by roughly 10%, with revenues increasing to $15.4 billion on a pro forma basis. The deal will not unlock value in the short term, but long term synergies of $300 million seem very appealing. Furthermore, investors are relieved that Baxter could find good use of its overseas cash balances, thereby avoiding repatriation taxes.

The increase in debt levels remains within acceptable ranges, however Baxter will lower its pace of share repurchases to generate more cash.

Investors are sending shares of Baxter to new highs, and for good reasons. The deal seems very appealing, especially when considering the significant synergies. Shares appear to be trading at fairly attractive valuation multiples, and the deal of Gambro will only add to that.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.