Fresenius Medical Care (FMS), the world's top dialysis company, unveiled a $3.5 billion acquisition of Renal Care Group Inc. (RCI) on Wednesday, helping it overtake DaVita (DVA) in the key U.S. market.

FMC's ordinary stock fell on fears the company was overpaying, however, raising its indebtedness, and investors also switched to its preference shares after FMC said it would convert them into ordinary stock at a discount.

FMC will pay $48 per share in cash for shares of Nashville, Tenn.-based Renal Care (search), a deal it said would be neutral to slightly accretive to earnings in 2006 and clearly accretive in 2007 and beyond as it boosts its number of kidney dialysis clinics.

"Renal is a very attractive target with high profitability, but FMC's price assigns a very high value to it," said Landesbank Rheinland-Pfalz analyst Alexander Groschke.

"Renal has been valued at 16 times enterprise value to EBIT, which is higher in those terms than FMC's value, and this is bound to lead to volatility in FMC shares today," he said.

The acquisition, which FMC expects to close in the second half of the year, will create a group with revenues of $7.5 billion, widening FMC's lead over Sweden's Gambro and DaVita as the world's top dialysis player.

Renal Care stock jumped 16.2 percent by 1416 GMT to $45.67 after touching $46.23. The offer price of $48 a share represents a premium of 22 percent over Tuesday's closing price.

FMC said it would convert its preference stock into ordinary shares at about a 10 percent discount to Tuesday's close.

FMC ordinary stock was down 3.6 percent at 60.22 euros by 1419 GMT, after a low of 59.26, underperforming a flat DAX index . The preference share rose 6.6 percent to 47.6 euros.

Traders said FMC bonds fell 3 to 5 points on news of the acquisition and were quoted at around 106 percent of face value.

"It's going to have a very significant impact on their leverage," said a trader in London. "You're probably looking at a weak double-B entity."

FMC is currently rated at BB+ by Standard & Poor's, the highest rating in the speculative grade category.

"We expect to reduce leverage fairly quickly over the next couple of years using the strong cash flows of the combined company," Lawrence Rosen, FMC's finance head, told a news conference. "It's difficult to predict, but we expect to remain in the double-B range for the credit rating."

Renal Care had sales of around $1.35 billion in 2004, with operating earnings of $254 million. It operated 425 clinics with 30,400 patients. The new group will treat more than 156,000 patients a year at 2,000 dialysis clinics worldwide.

A spokesman said FMC expected synergies of $30 million to $40 million from the acquisition in 2006, and $40 million to $50 million a year from 2007.

The synergies come from administrative costs and purchasing, with an increase in market share of products sold to Renal Care. The group expects revamp costs of around $50 million this year.

Renal Care generates 43 percent of its revenues from privately insured U.S. patients, against 30 percent for FMC.

FMC will finance the deal by replacing a $1.2 billion credit agreement with a $5.0 billion senior credit facility.

Chief Executive Ben Lipps said the deal would lift FMC's share of U.S. dialysis services to between 35 and 36 percent from 27 percent, above DaVita and Gambro's combined 30 percent.

Deutsche Bank acted as financial adviser to FMC for the acquisition, which is subject to approval from Renal's shareholders and antitrust authorities.

FMC said first-quarter operating profit was $220 million, against the $222 million average from a Reuters poll of 17 analysts. Sales came in at $1.609 billion, compared with the poll's average of $1.603 billion.

FMC reiterated it expected full-year revenues to rise by 6 to 9 percent and net income to grow by more than 10 percent, before the impact of the acquisition.

FMC will also change its legal structure to allow parent Fresenius AG (search) control over it even at a 25 percent holding. Fresenius's holding in FMC will come down to 37 percent from 50.8 percent as a result of the stock conversion.