‘Progress Has Not Been Fast Enough’: Enhabit Reveals Plans to Launch Strategic Alternatives Process

Enhabit Inc. (NYSE: EHAB) has announced plans to launch a strategic review process that could result in a potential sale. The consideration marks another move among large home health and hospice providers in the industry.

The company is getting ready to explore various transaction options in order to satisfy the terms of its Tax Matters Agreement with Encompass Health Corp. (NYSE: EHC), according to Enhabit President and CEO Barbara Jacobsmeyer.

Enhabit spun off from Encompass Health last July, becoming its own publicly traded entity. A Tax Matters Agreement is a type of understanding between a parent company and new spinoff entity, typically for financial- or tax-reporting purposes.

“The board expects that any potential review would consider a wide range of options for the company including, among other things, a potential sale, merger or other strategic transaction,” Jacobsmeyer said on a Thursday earnings call discussing second-quarter financial results. “There are no assurances that the conditions and the Tax Matters Agreement will be satisfied, that Enhabit will initiate such a process or, as launched, that a process would result in Enhabit pursuing a particular transaction or other strategic outcome.”

Dallas-based Enhabit’s footprint includes 255 home health locations and 108 hospice locations across 34 states.

The company’s overall revenue reached $262.3 million during the second quarter of 2023, a 2.1% year-over-year decline. Its hospice segment brought in $48.5 million in Q2, a modest 1.5% increase from $47.8 million compared to the same period last year.

Enhabit’s board and management team are weighing the impacts and outcomes of a potential sale, though no plans have been solidified, according to Jacobsmeyer.

“While we continue to make progress with our strategic initiatives, the pace of the progress has not been fast enough in 2023 to meet our initial guidance,” Jacobsmeyer stated. “The Tax Matters Agreement includes securing a tax opinion of legal counsel satisfactory to Encompass Health in its sole and absolute discretion, that the actions taken by Enhabit would not jeopardize the tax-free treatment of a spinoff of Enhabit. If these conditions are satisfied, the board with the assistance of independent advisors intends to launch a strategic alternatives process.”

The announcement comes on the heels of a minority investor recently urging the hospice and home health provider to consider a “full and fair sale process.” The investor – New York-based hedge fund AREX Capital Management, holds roughly 4.5% of the shares of Enhabit.

The company proposed the sale idea in a letter sent to the provider’s board of directors. AREX has been an Enhabit investor since its spinoff from Encompass Health.

In its letter, AREX pushed Enhabit to consider strategic alternatives because of the company’s “poor operational and share price performance.” Since the start of the year, Enhabit’s share price has fallen more than 7% to less than $12 per share – down significantly compared to when the company first separated from Encompass.

Enhabit’s financial pressures are tied to strains in hospice admission volumes and referral streams, as well as shorter lengths of stay. Hospice admissions reached 2,837 in the second quarter, while average daily census volumes hit 3,423 – both areas seeing slight year-over-year decreases, at 0.1% and 0.7%, respectively. Meanwhile, Enhabit’s average length of hospice stay was 108 days, a 0.9% drop compared to Q2 in 2022.

A sale could result in the most value to Enhabit’s shareholders, according to AREX.

The consideration marks the latest move in a trend of large home health and hospice providers weighing the benefits and risks of similar deals in the industry. Some of Enhabit’s largest peers have already agreed to, or even completed, transactions of their own.

“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.

UnitedHealth Group (NYSE: UNH) subsidiary Optum closed a $5.4 billion deal to acquire LHC Group in February. Meanwhile, Amedisys Inc. (NASDAQ: AMED) is also in the process of being acquired by Optum.

While admissions in home health and hospice are slowly stabilizing, volumes trail behind some of Enhabit’s “largest peers” in industry, according to Jacobsmeyer. Reimbursement trends towards value-based payment have been a leading factor, as other larger providers have been in the Medicare Advantage realm longer with more time to build a presence among payers, she noted.

Additionally, fee-for-service hospice referrals have “eroded” as the value-based payment landscape evolves, according to Enhabit CFO Crissy Carlisle.

“Our guidance is most sensitive to three factors: episodic admissions, the transition of non-episodic admissions to our new national and regional payer contracts, and improved clinical productivity in hospice,” Carlisle stated. “With the shift of Medicare eligibles into Medicare Advantage happening faster than anyone anticipated, we are trying to forecast a rapidly moving target. While our progress with our payer innovation agreements has been strong, it has not been enough to overcome the negative impact of the continued erosion of Medicare fee-for-service volume.”

Amid the transaction consideration, both home health and hospice acquisitions remain a cornerstone of Enhabit’s strategic focus.

The company opened one hospice de novo and two home health locations this year. These were steps towards its stated goal to open 10 hospice de novos annually, primarily co-locating these with existing home health assets.

“We believe the value of our company is supported by long-term secular trends: the aging population; the need to shift more health care into the lowest cost setting and patient preference for care in their home” Jacobsmeyer said.