Enhabit (EHAB) ($413MM market cap) is a July 2022 spinoff of Embody Well being (EHC) that gives dwelling well being and hospice care. Just like many current spinoffs, Embody Well being loaded Enhabit up with debt and dividended again the proceeds to themselves, as can also be typical not too long ago, Enhabit bumped into enterprise headwinds shortly after being spun and the inventory value has suffered since. Activists confirmed up fairly rapidly right here demanding a sale as the house well being and hospice care business has been consolidating with Enhabit being one of many few remaining standalone public corporations within the sector.
With tax free spinoffs, there is a two 12 months secure harbor ready interval for the spin to be acquired with out risking tax free standing. The danger of voiding the tax free standing pertains to if the client had acquisition discussions relating to the spin previous to the spinoff, if there have been no talks, then there could be M&A inside that two 12 months interval. An instance I keep in mind off the highest of my head was Baxalta (BXLT) that was spun from Baxter Worldwide (BAX) again on 7/1/15 and was rapidly acquired by Shire (which was later acquired by Takeda) on 1/11/16. Previous to spinning out Enhabit and contemplating the consolidating nature of the business, Embody possible had discussions with numerous strategic and different consumers main as much as the spin choice, doubtlessly boxing out essentially the most logical consumers.
With that background, it’s unsurprising that alongside earnings this week, Enhabit introduced that they have been concluding their strategic evaluate with no sale and are going to proceed as a standalone firm. The inventory dropped roughly 15% and activist investor AREX Capital Administration (4.8%) put forth a proxy struggle to exchange seven board members with their very own slate. I do not know something about AREX, however EHAB is an outsized place for them and on the floor, their board slate does look extremely certified.
Again to the enterprise, dwelling well being and hospice care has some sturdy tailwinds with an growing old inhabitants, a push in the direction of cheaper healthcare settings and a extremely fragmented market (even the bigger gamers like Enhabit solely have single digit market shares) in want of consolidation (clinic/route density is a vital driver of operational leverage). This must be a GDP plus a pair hundred foundation level progress enterprise. The business can also be present process a shift from conventional Medicare to Medicare Benefit plans the place the affected person has extra of a monetary duty and companies are discounted/margins are decrease. On the time of the spin, Enhabit had a bigger share of conventional Medicare sufferers than friends and the transfer to Medicare Benefit or different personal plans harm margins fairly dramatically, inflicting Enhabit to overlook steering a number of occasions and lose credibility with traders. That blend shift appears to have stabilized with conventional Medicare sufferers rising for the primary time sequentially in Q1.
With the enterprise considerably stabilized (though extremely levered) and an activist within the combine pushing for each operational enhancements and certain a restart of a sale course of following 7/1/2024, this might be a compelling alternative.
The 2 most up-to-date public transactions have been with Optum/UnitedHealth as the client as they give the impression of being to scale back their prices by bringing dwelling well being care in home. Amedisys has but to shut, the EBITDA a number of was 15.5x when it was introduced and has since dropped all the way down to 13.7x with continued EBITDA progress. Addus HomeCare (ADUS) is a considerably comparable enterprise, they do compete within the dwelling care and hospice areas however the majority of their enterprise is in what they name private care, which implies somebody comes to assist with the every day duties that turn out to be tougher as folks age quite than medical companies.
I do not like placing 100+% value targets on new positions, however with the mix of monetary leverage, some improved working leverage and the potential for a strategic takeout someday down the highway, EHAB may actually be that low-cost right here.
Disclosure: I personal shares of EHAB
