Enhabit (EHAB) ($413MM market cap) is a July 2022 spinoff of Embody Well being (EHC) that gives residence well being and hospice care. Much like many current spinoffs, Embody Well being loaded Enhabit up with debt and dividended again the proceeds to themselves, as can be typical just 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 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 chance 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 determination, probably boxing out probably the most logical consumers.
With that background, it’s unsurprising that alongside earnings this week, Enhabit introduced that they have been concluding their strategic evaluation with out 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 battle to interchange 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 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 crucial driver of operational leverage). This must be a GDP plus a pair hundred foundation level progress enterprise. The business can 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 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 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 sure 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 client as they appear 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 progress. Addus HomeCare (ADUS) is a considerably comparable 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 suggests somebody comes to assist with the every day duties that turn out to be harder as individuals age somewhat than medical companies.
I do not like placing 100+% worth targets on new positions, however with the mixture of monetary 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
