Enhabit Begins Mulling Strategic Alternatives, Possible Sale

Enhabit Inc. (NYSE: EHAB) has confirmed that it will begin considering “strategic alternatives” that could include a potential sale or merger.

The Dallas-based home health and hospice provider announced today that it had satisfied the conditions of its Tax Matters Agreement (TMA) with its former parent company Encompass Health (NYSE: EHC). Enhabit emerged from the 2021 spinoff of Encompass Health’s home health and hospice segment.

A TMA is an agreement between a parent company and a new spinoff entity, typically for financial reporting purposes. With this hurdle cleared, Enhabit can consider its options.

“Enhabit is a leader in a valuable industry, providing a better way to care where patients prefer to receive their care,” the company indicated in a statement. “The Enhabit board and management team are aligned in their belief that the best way to enhance value for stockholders is to comprehensively review the company’s strategic alternatives, including a potential sale of Enhabit. We will pursue the pathway that enhances value for our stockholders and ensures we can continue to deliver exceptional care to our patients.”

Dallas-based Enhabit operates 255 home health locations and 108 hospice locations in 34 states.

Discussions of a potential sale or merger have been tied to uneven quarterly financial results. Progress on the company’s goals has not been fast enough, CEO Barb Jacobsmeyer recently said in an earnings call.

The company’s net service revenue fell 2.1% year-over-year to $262.3 million during Q2. Its hospice segment saw a modest increase at $48.5 million in Q2, up 1.5% from the prior year’s quarter.

Contributing to this was an increase in Enhabit’s non-Medicare business that did not as well expected, according to Brian Tanquilut, equity analyst for the investment banking firm Jefferies Financial Group.

“While management has succeeded in winning new [Medicare Advantage] contracts that reimburse at more reasonable/profitable rates and presumably will bring more volume as they ramp over the next few months, the shift in EHAB’s business to incorporate more non-Medicare business has not gone smoothly,” Tanquilut indicated in a research note. “While net nurse recruitment has shown meaningful improvement, management commentary suggests labor cost drags related to the implementation of some of these new contracts that are impacting near-term earnings power.”

One of Enhabit’s minority investors, AREX Capital Management, in June began pushing the company to pursue a sale or other alternative in a letter to its board of directors. AREX holds about 4.5% of Enhabit’s shares.

AREX was motivated in part by recent, massive deals involving similar companies. For example, during the past year the UnitedHealth Group (NYSE: UNH) subsidiary Optum closed a deal to purchase LHC Group for $5.4 billion and agreed to acquire Amedisys (NASDAQ: AMED) for $3.3 billion.

This followed Humana Inc.’s (NYSE: HUM) 2021 acquisition of Kindred at Home for $8.1 billion.

“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.

Enhabit has set no timeframe for making a decision on its future.

The company’s stock’s zig-zagged today, reaching a high of $12.18 shortly after the markets opened. It reached a low point of $11.76 late in the afternoon, but began to tick back up after news of the potential repositioning broke.

A possible sale should have a positive impact, according to Tanquilut.

“With management pointing to an upcoming strategic review that will likely result in a sale of the company in the next 12-18 mos — given well-known strategic interest in scaled home health assets and EHAB’s current depressed valuation — we are maintaining our Buy and point to meaningful potential stock upside,” Tanquilut said in the note.