Enhabit (EHAB) ($413MM market cap) is a July 2022 spinoff of Embody Well being (EHC) that gives residence well being and hospice care. Just like many latest spinoffs, Embody Well being loaded Enhabit up with debt and dividended again the proceeds to themselves, as can also be typical lately, Enhabit bumped into enterprise headwinds shortly after being spun and the inventory worth has suffered since. Activists confirmed up fairly rapidly right here demanding a sale as the house well being and hospice care trade has been consolidating with Enhabit being one of many few remaining standalone public firms within the sector.
With tax free spinoffs, there is a two yr 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 customer had acquisition discussions concerning the spin previous to the spinoff, if there have been no talks, then there may be M&A inside that two yr interval. An instance I bear 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 trade, Embody seemingly had discussions with numerous strategic and different consumers main as much as the spin determination, probably 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 and not using a 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 combat 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, residence well being and hospice care has some robust tailwinds with an getting old inhabitants, a push in 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 crucial driver of operational leverage). This ought to be a GDP plus a pair hundred foundation level development enterprise. The trade can also be present process a shift from conventional Medicare to Medicare Benefit plans the place the affected person has extra of a monetary accountability 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 non-public plans damage margins fairly dramatically, inflicting Enhabit to overlook steerage a number of occasions and lose credibility with buyers. That blend shift appears to have stabilized with conventional Medicare sufferers growing 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 may very well be a compelling alternative.
The 2 most up-to-date public transactions have been with Optum/UnitedHealth as the customer as they give the impression of being to cut back their prices by bringing residence 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 right down to 13.7x with continued EBITDA development. Addus HomeCare (ADUS) is a considerably related enterprise, they do compete within the residence 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 each day duties that grow to be harder as individuals age reasonably than medical companies.
I do not like placing 100+% worth targets on new positions, however with the mix of economic leverage, some improved working leverage and the potential for a strategic takeout someday down the street, EHAB may actually be that low-cost right here.
Disclosure: I personal shares of EHAB
