A minority investor in Enhabit Inc. (NYSE: EHAB) is urging the hospice and home health provider to consider a “full and fair sale process.”
The investor – New York-based hedge fund AREX Capital Management, which holds about 4.5% of the shares of Enhabit – brought up the sale idea in a letter sent to the provider’s board of directors. AREX has been an Enhabit investor since its spinoff from Encompass Health Corporation (NYSE: EHC) in July 2022, according to the fund.
“The recent M&A activity among Enhabit’s peers illustrates the enormous potential returns to shareholders if Enhabit were to pursue a sale,” AREX wrote in its letter.
The Dallas-based Enhabit has 107 hospice locations and 253 home health offices in nearly three dozen states. In the first quarter of 2023, the company’s net service revenue totaled $265.1 million, with $49.3 million coming from its hospice segment.
Enhabit’s hospice segment, in particular, has been bolstered in 2023 by continued improvement in staffing. Moving forward, the provider is aiming to open 10 hospice de novos annually, co-locating those locations with its home health footprint.
“A lot of our focus right now when you think about growing the company, our de novo strategy is a bit more focused on hospice,” Enhabit CFO Crissy Carlisle said earlier in June during the Jeffries Financial Group’s Healthcare Management Conference.
In its letter, AREX pushes 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 – down significantly compared to when the company first separated from Encompass.
The hedge fund recognizes that hospice and 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.