Enhabit (EHAB) ($413MM market cap) is a July 2022 spinoff of Embody Well being (EHC) that gives dwelling well being and hospice care. Much like many latest spinoffs, Embody Well being loaded Enhabit up with debt and dividended again the proceeds to themselves, as can 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 shortly 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 yr protected 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 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 shortly 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 varied strategic and different patrons main as much as the spin determination, doubtlessly boxing out essentially the most logical patrons.
With that background, it’s unsurprising that alongside earnings this week, Enhabit introduced that they have been concluding their strategic interview 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 battle 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 ageing 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 needs to 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 providers 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 steerage a number of instances and lose credibility with buyers. 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 appear 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 right 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 each day duties that turn out to be tougher as individuals age fairly than medical providers.
I do not like placing 100+% value 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 highway, EHAB might actually be that low-cost right here.
Disclosure: I personal shares of EHAB
