An investor in Enhabit Inc. (NYSE: EHAB) is calling on the home health and hospice company to consider strategic alternatives to operating as a standalone business. And those alternatives, the investor argues, should include exploring a sale.
The investor is New York-based hedge fund AREX Capital Management, which has been an Enhabit investor since its spinoff from Encompass Health Corporation (NYSE: EHC) in July 2022. AREX holds about 4.5% of the shares of Enhabit’s common stock, according to the fund.
“Given Enhabit’s objectively challenged execution and share price performance, the board should fully explore the potential delivery of substantial and fair value to shareholders through a sale of the Company,” AREX wrote in a letter sent to Enhabit’s board of directors. “We are highly confident that a full and fair strategic alternatives review will make it very clear to the board that, as compared to the risks and potential rewards inherent in the status quo, a sale is the obvious way to maximize value for all shareholders.”
The Dallas-based Enhabit has 253 home health locations and 107 hospice offices in 34 states. In the first quarter of 2023, the company’s net service revenue totaled $265.1 million, with $215.8 million of that coming from its home health segment.
In spinning off Enhabit, Encompass Health’s leadership team believed it could maximize the long-term value of one of the nation’s largest freestanding home health businesses. Enhabit’s top executives believe the same, despite some of the industry-wide headwinds that have plagued home health providers over the past 18 months.
Additionally, while Enhabit’s stock performance hasn’t played out like the company anticipated initially, the provider’s leaders are encouraged by the progress they have made negotiating more favorable managed care contracts.
“One of the things I’ve learned the most is how slow progressing it is – as we have worked with the managed care companies, particularly the Medicare Advantage side of things,” Enhabit CEO Barb Jacobsmeyer recently said at the Jefferies Healthcare Conference. “It’s been nice to see the progress, … but that certainly has come with a lot of work and a lot of time.”
Enhabit likewise started to see staffing improvements in the first quarter of the year.
“We continue to make progress in two of our critical success factors for 2023 – payer innovation, and the recruitment and retention of clinical staff,” Jacobsmeyer said during a Q1 earnings call.
In its letter, AREX urges Enhabit to consider strategic alternatives because of the company’s “poor operational and share price performance.” Since the start of the year, Enhabit’s share price has fallen 7% to just over $12 per share.
AREX in the letter recognizes that home health providers have had to face “unique regulatory and operational challenges,” but argues that “missteps” have “badly eroded confidence in management.” AREX does not specify what those missteps are in its letter
“In our experience, when such mistakes occur early in a newly public company’s journey, it can be incredibly difficult for that company to emerge from the ‘penalty box’ with investors – even with vastly improved execution over an exceedingly long period,” the letter continues.
AREX’s letter comes at a time when Enhabit’s largest peers have already agreed to, or even completed, transactions of their own.
UnitedHealth Group (NYSE: UNH) subsidiary Optum closed a $5.4 billion deal to acquire LHC Group in February. Meanwhile, Amedisys Inc. (Nasdaq: AMED) announced a $3.6 billion merger agreement with Option Care Health (NYSE: OPCH) in May, with Optum also putting in an offer on the provider in June.
In light of those developments, AREX believes a sale would unlock the most value to Enhabit’s current shareholders.
“[The] secular trend towards value-based care has substantially increased the strategic value of home health businesses, as evidenced by Humana’s acquisition of Kindred at Home, UnitedHealth’s acquisition of LHC Group, and most recently by Option Care Health’s announced acquisition of Amedisys, which was followed by an even higher bid from UnitedHealth,” the letter states. “In fact, once the Amedisys deal closes (with whichever suitor is victorious), Enhabit will be the last remaining publicly traded company focused primarily on home health, and our diligence suggests that there are many market participants who would logically have interest in acquiring Enhabit.”
Yet, in part, it’s that standalone status that offers long-term value, Enhabit’s leaders believe.
“I think, as we look forward, we’re kind of hopeful for the day that Humana wants CenterWell to see all of their patients and maybe United wants LHC Group and potentially Amedisys to [see theirs], because that would leave the fee for service for us, and would also give us opportunity to sit even closer at the table with the other payers for negotiations,” Jacobsmeyer said during the Jefferies presentation.
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