As Encompass Health Corporation (NYSE: EHC) spins off its home health and hospice segment into Enhabit Home Health & Hospice, they are keeping their options open when it comes to a sale or merger of the new company. The Enhabit spin off is expected to complete at the end of the second quarter.
The spin off may “differ materially from those anticipated,” compared to when Encompass first announced the strategic repositioning in December 2020, following recent talks with its stockholders, including JANA Partners LLC.
Considerations such as market conditions, regulations, and expected benefits and costs will shape the outcome of the transaction.
“As Encompass Health proceeds with the separation process, our board and management will assess any value-creating strategic opportunities and remain open to value-maximizing alternatives, including a sale or merger of Enhabit,” said the company in an announcement.
The Encompass home health and hospice segment provided care to almost 213,700 patients in 2021 from 347 locations in 35 states. Of these, 96 were hospice sites across 22 states, which served roughly 13,700 patients.
Encompass Home Health and Hospice CEO Barb Jacobsmeyer told Home Health Care News in February that rebranding was one of her top priorities this year.
Post-spin off, current Encompass shareholders will own stock in both companies, tax free. Transition-related expenses will include development of the business infrastructure within Enhabit, expected to total an estimated $26 million to $28 million.
Encompass is in the process of assembling a board for Enhabit, with election processes forthcoming this year. The board will consist of no more than 12 directors who will stand for election before the conclusion of 2022.
A number of factors could influence a decision to proceed as planned or pursue a sale. A key consideration is whether Encompass can retain and hire staff and maintain relationships with existing partners and suppliers as it brings its home-based care business under Enhabit.
Adverse conditions such as those associated COVID-19 headwinds could also come into play. The hospice and home health segment brought in $1.1 billion in revenue last year.
Nevertheless, the emergence of the Delta and Omicron variants created difficulties for Encompass last year. The company’s hospice business saw a 2.8% decline in revenue during the fourth quarter of last year, falling to $52.1 million from $53.6 million during the prior year’s quarter.
The spin off is likely to benefit Encompass. Among these are an enhanced management focus, separate capital structures, independent equity currencies and the allocation of financial resources that better align with leader incentives.
“[Encompass Health’s] comments today reiterating their previously-stated intent to consummate a public, non-taxable spin-off of the company’s home health and hospice asset should be viewed positively, as it refutes investor concerns that emerged on the company’s Q3 [2021] earnings call about management’s commitment to the [first half of 2022] completion timeline that they had outlined,” Brian Tanquilut, equity analyst for Jefferies Financial Group indicated in a research note.
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