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To expand its footprint across the U.S., DaVita Inc. (NYSE:DVA) has agreed to acquire its competitor DSI Renal, Inc. ("DSI"), for approximately $690 million, subject to customary closing conditions. DaVita expects to complete the deal by the second or the third quarter of 2011.

DaVita will require the Hart-Scott-Rodino antitrust clearance to complete the deal. In addition, DaVita believes that it will have to divest some of its centers as a condition of the transaction. Credit Suisse Group (NYSE:CS) will act as its financial advisor in the deal.

With the introduction of the new bundled-payment system, the market for dialysis is seeing major acquisition activity.

Earlier, Medicare used to pay for certain dialysis services under a partial bundled rate, referred to as the composite rate. Payments for these composite rate services represent about 60% of total Medicare payments to End-Stage Renal Disease (ESRD) facilities.

The remaining 40% of Medicare spending for dialysis services is for separately billed items such as drugs, but may also include laboratory services, supplies and blood products. However, the new rule states that the state-run insurer Medicare will not pay clinic operators for individual services and injectable drugs anymore and instead make a lump sum reimbursement.

This has resulted in an increase in the co-insurance payments of dialysis patients, which in turn have raised the costs at their end. Therefore, DaVita’s decision to acquire DSI was inevitable.

In November 2010, Renal Advantage and Liberty Dialysis also agreed to merge to form the third-largest U.S. dialysis provider.

We believe that the acquisition of DSI will bring in new areas of work for DaVita in the mid-western, southern and some western States, which will continue to improve the quality of life of DSI’s patients and provide high quality care.

The combination of these two will benefit the patients and staff to a great extent. Moreover, through this acquisition, DaVita will be able to provide chronic kidney disease services to DSI patients, which will help lower costs.

DSI currently operates 106 dialysis centers serving approximately 8,000 patients. DSI’s current annualized revenue is approximately $360 million.