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(Corrects paragraph 17 to remove ticker EQT.N that is not associated with EQT, the private equity firm. The error first occurred in Update 2. Corrects paragraph two to add dropped word "down")
* Baxter says Gambro will add to earnings after 2014
* Baxter to issue new debt, cut share buybacks
* Gambro would boost Baxter's kidney business
* Baxter shares down more than 1 percent
By Debra Sherman and Caroline Humer
Dec 4 (Reuters) - Baxter International Inc said on Tuesday that it would buy privately held Swedish kidney dialysis product company Gambro AB for about $4 billion, a tie up that would put it in the No. 2 position in the dialysis market.
Baxter, whose shares were down more than 1 percent in afternoon trading, will finance the acquisition with debt and cash. The deal, which is expected to close in the first half of next year, marks Baxter's biggest acquisition since Chief Executive Robert Parkinson took the helm in 2004.
Baxter manufactures kidney dialysis equipment, drug infusion pumps and blood therapy products. The Gambro acquisition will round out Baxter's renal business, which accounted for almost one-fifth of the company's 2011 revenue of $13.89 billion.
Gambro is one of the largest makers of equipment for hemodialysis, which is generally performed in a hospital or clinic. The dialysis from Baxter's machines is called peritoneal and can be performed at home.
Gambro's sales have been flat to weaker in recent years, undermined partly by capacity constraints, but Baxter executives voiced confidence during a conference call with analysts that the business can be turned around.
"It is a big market and it is going to continue to grow for a long time. There are only so many kidney transplants available in the world," Parkinson told analysts.
Hemodialysis is a method that is used to remove waste products from the blood when the kidneys fail. Another method is peritoneal dialysis, a treatment for severe chronic kidney disease that uses the patient's own membrane inside the body as a filter to clear waste. The third treatment option is a kidney transplant.
"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 our overly optimistic. This is an acquisition that is dependent on execution," he said. "This is something we know we can do and do well."
He said the planned acquisition did not represent a change in the direction for the company, which has invested in stem cell research and a treatment for Alzheimer's disease.
Shares of Baxter were down 1 percent at $65.14 on Tuesday afternoon on the New York Stock Exchange.
Some analysts said they were concerned by the price tag and that the company will scale back its share buyback program in order to acquire Gambro.
"I think the deal makes sense. I think it does fit well with their existing renal business and I think there probably are synergies, but at the same time it is a lot of cash they are paying for this thing. They are taking on a significant amount of debt," said Michael Matson, an analyst at Mizuho Securities USA.
Moody's, the credit rating agency, said it put Baxter's A3 rating on review for downgrade following Gambro announcement.
Derrick Sung, an analyst with Bernstein Research, noted that Baxter will be paying 2.5 times sales, which is not "unreasonable" but appears to be on the high end of comparable deals.
The Gambro deal marks further consolidation in the kidney dialysis market, where Gambro and Baxter compete against companies including U.S.-based DaVita HealthCare Partners Inc and Germany's Fresenius Medical Care AG & Co KGaA , the biggest player in the hemodialysis market.
"I think in the longer term, the ambition is to try to challenge Fresenius," currently the market leader, analyst Kristofer Liljeberg of Sweden's Carnegie investment bank said.
However, he said, Gambro, which is owned by Swedish investment holding company Investor AB and its partly owned private equity company, EQT, had been struggling in recent years with slow growth and price competition.
Liljeberg said the deal was a good one for family-owned Investor, which controls several of Sweden's top companies. Since they bought Gambro, Investor and EQT have sold off its clinics and a blood component business.
"This is a good long-term home for Gambro," Borje Ekholm, CEO of Investor, said. "These two companies have a lot of things in common. They share similar values to improve the lives of patients. They have a very complementary geographic fit."
More than 2 million patients globally are on some form of dialysis, and that has been increasing more than 5 percent annually, in part because of the rising rates of diabetes and hypertension.
Excluding special items, Baxter expects the Gambro transaction to reduce earnings per diluted share by 10 to 15 cents in 2013 and be neutral or add modestly to them in 2014. The deal is expected to close in the first half of next year.
Excluding the impact of special items and estimated amortization of intangible assets, the company said the deal should not affect earnings in 2013 and add 20 to 25 cents a diluted share in 2014.
Baxter said it expected the deal to add to earnings per diluted share, excluding special items, after 2014.
The suburban Chicago company said it expected over five years to increase sales by 7 to 8 percent, excluding the impact of currency fluctuations, on a compound annual basis, with earnings per diluted share, excluding special items, rising by 8 to 10 percent.
"Companies like Baxter can unlock a fair amount of value when they find strategic use for their overseas cash," said Piper Jaffray analyst Matt Miksic.
Indeed, Baxter said it planned to finance the deal with cash overseas. Multinational companies that have large international sales often have difficulties moving that cash back to the United States where they can put it to use.
J.P. Morgan was Baxter's financial adviser for the deal. (Reporting by Esha Dey in Bangalore, Debra Sherman in Chicago, Caroline Humer in New York, and Patrick Lannin and Mia Shanley in Stockholm; editing by Joyjeet Das, Lisa Von Ahn, Matthew Lewis and Marguerita Choy)