Encompass Health Corporation (NYSE: EHC) last week announced it was keeping its options open on the potential sale or merger of its home health and hospice segment, Enhabit Home Health & Hospice. The spinoff saga continues to evolve, with new reports Monday naming Aveanna Healthcare Holdings (NASDAQ: AVAH) and global private equity firm Advent International as potential investors.

Following recent talks with its stockholders, which included JANA Partners LLC, Encompass Health signaled that spinoff plans may “differ materially from those anticipated,” compared to when it first announced the strategic repositioning late in 2020.

Now, a Reuters report has broadened the scope of reasoning behind this announcement, indicating that both Advent and Aveanna have expressed interest in acquiring Enhabit, with the Encompass Health segment potentially fetching upwards of $3 billion in a sale.

A deal would be contingent on Aveanna securing “significant financing support,” an analyst note from Stephens indicated. Aveanna has a market capitalization of $745 million, according to Reuters.

“[Aveanna] has a core strategic objective of rapidly scaling its home health and hospice business, which clearly could get accomplished through acquiring Enhabit,” Stephens analysts wrote. “There are a number of other established companies pursuing a similar strategy. This could limit the number of available targets and/or lead to higher acquisition multiples for AVAH versus current expectations.”

Reuters indicated financial backing for the deal could come from “top shareholders” of Aveanna, including private equity firm Bain Capital.

Since becoming a public company last April, Atlanta-based Aveanna has been aggressive on its strategic growth plans to expand in the senior home health market. Prior to going public, the company historically focused on providing specialized in-home care for complex pediatric patients.

The other major player named by Reuters, Advent, owns AccentCare, which provides home health, hospice and home care services, among others. The company recently unified all of its business names under its main brand.

As of last February, AccentCare was the fifth-largest home health provider in the country, based on fee-for-service Medicare volume. It was likewise the fifth-largest hospice company, according to LexisNexis Risk Solutions.

Transition-related expenses of Enhabit’s sale are anticipated to reach an estimated $26 million to $28 million and include the development of the business infrastructure within the company. 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.

The company’s hospice and home health segment brought in $1.1 billion in revenue last year.

Valuation metrics have come into play for the sale of Enhabit.

Post-spinoff, current Encompass shareholders will own stock in both companies, tax free. If Encompass is unable to obtain a value-creative outcome for these assets, stock prices could decline as a result, Stephen research analysts indicated. Limitations on the company’s ability to pursue strategic acquisitions and joint ventures with health system partners “may curtail the growth profile of the consolidated business,” they wrote.

Valuations in the hospice market have come down by roughly a third compared to a year ago when they were riding at their highest level, a trend that could be increasingly drawing the eyes of investors, according to Mark Kulik, managing director at mergers-and-acquisitions firm The Braff Group.

“If you look at the public companies, they’ve come down from their peak valuations approaching about a year ago, when they were all riding at their highest level of valuations,” Kulik told Hospice News. “Versus having to buy at that level, the marketplace may have tamped down a bit, and [investors] now have a chance to buy quality assets at a little bit of a lower purchase price and lower valuation than it would have been a year ago.”

Multiples in the hospice space hit record heights in 2020 and 2021, reaching as high as 26x, according to PwC’s Health Research Institute. The Braff Group in a third quarter report last year projected a “modest fall-off” in hospice M&A activity over the next 12 to 36 months, as the big players in the space resume picking up home health acquisitions.

These high valuations have raised the stakes in hospice deals and stepped up competition for acquisition targets in a crowded hospice market, making it difficult for smaller providers to expand or compete with larger companies.

“There’s not a lot of mid- and small-sized businesses left, and we’ve a gap between these multibillion dollar players,” said Kulik. “It’s a maturing of the hospice and home industries, where you’re seeing the larger players getting larger and then have the ability to potentially take on more risk than smaller players ever have a chance to do.”

Aside from a high price tag, industry-wide staffing shortages also pose risk in the sale of Enhabit. Health care worker wage inflation has made competition for labor resources fierce, putting the ability to retain and recruit sufficient staff at a premium.

That could be a huge factor in a buyer’s decision to purchase Enhabit from the Birmingham, Alabama-based Encompass Health.