There have been constant rumors that Fresenius * could announce at results (22/2/2023) a deconsolidation/sale of its 34% controlling interest in Fresenius Medical Care (FMC) already mentioned in our 9^th December 2022 blog. The profile of the new Fresenius CEO (Ex Siemens with a long track record in restructuring) and the departure of FMC CEO validates this scenario.

Fresenius is a German healthcare group with 4 core business segments. Fresenius Medical Care (FMC) (a separately listed company where Fresenius has a 34% stake) which runs the world's largest network of dialysis clinics and provides treatment for patients with chronic kidney failure. Other Fresenius activities include Kabi which specializes in intravenously administered generic intravenous drugs, clinical nutrition, and infusion therapies. Helios is a private hospital operator. VAMED manages projects and provides services for healthcare facilities worldwide.

We see 2 major positive elements in this potential deconsolidation of Fresenius Medical Care

1-A deleveraged company

°For many years, Fresenius consolidated FMC results. This was the reason for a very high debt /equity ratio. On top of this, Fresenius had to finance the acquisitions in both the dialysis and hospital activity.  For the past 3 years, investors’ main concern has been  the state of the balance sheet.

°If we conservatively assume a 20% premium for the controlling 34% stake of Fresenius in FMC this implies a Eur 4.2 billion, Fresenius total debt would shrink from the current Eur 26 billion and 1.4 debt/equity ratio to 9.8 billion and 0.47 ratio. Correspondingly, its debt-to-equity ratio would fall from 1.4X to 0.47X.

°Some analysts consider that a controlling stake in Fresenius Medical Care (FMC) could be sold at a much higher premium (50%or more), but, for the sake of the argument, we prefer to keep a conservative approach

2-A refocused company

°For many years, Fresenius was distracted by FMC. When the dialysis activity was booming (FMC business) investors were just buying FMC which, over time, created a holding discount for Fresenius share price. With some good reason, the market saw no obvious synergies between the Dialysis activity and other Fresenius businesses (clinical nutrition and hospitals). Logically, between 1998 and 2006, Fresenius shares underperformed FMC.

°Over the most recent years (2020-2023) Fresenius management was also distracted by operational issues at FMC. Most of Fresenius issues were concentrated in FMC (Covid impact, staff shortage) affecting the dialysis segment but Fresenius and FMC underperformed in the same manner: -35% and -43% over the past 3 years.

In brief, Fresenius involvement in FMC creates an asymmetrical risk

°There are very clear synergies in terms of clients and products between Kabi, Helios and Vamed. Fresenius without FMC would be a much more coherent company from an industrial point of view.

Conclusion

A Fresenius ex FMC would carry less debt. It would command higher operational margins (11.6% versus 10.9%). A better business and a stronger balance sheet would spur a valuation re-rating. Fresenius currently trades on a 9x PE. A refocused Fresenius could easily trade around 20x. This would still assume a chunky 30% discount when compared to peers such as Baxter International which trades on 30X.

*Fresenius is owned by Deshima certificate “Croissance Contrariante Europe”