AREX Capital Management, LP, together with its affiliates
(collectively, “AREX”), the owners of approximately 4.5% of the
shares of Enhabit, Inc. (NYSE: EHAB) (“Enhabit” or the “Company”),
today issued an open letter to the Company’s Board of Directors
(the “Board”).
In its letter, AREX outlines Enhabit’s dramatic
share price underperformance since its spin-off, which AREX
believes is largely due to the Company’s poor execution and
communication. AREX acknowledges that the Company has begun
interviewing the two highly qualified director candidates that it
has presented to Enhabit’s Board in order to expedite the Board’s
announced Transition Plan. However, AREX believes that the Board
must also immediately commit to launching a review of strategic
alternatives before the end of 2023 given the compelling value that
a full and fair sale process could deliver to shareholders.
If the Board is unwilling to make this important
and appropriate commitment, AREX has indicated that it will
consider all options at its disposal to ensure that shareholder
value is maximized and that the Board is held accountable.
The full text of the letter is set forth
below:
June 13, 2023
Via Electronic Mail
The Board of DirectorsEnhabit, Inc.6688 N. Central
ExpresswaySuite 1300Dallas, TX 75206
Attention: Barbara A. Jacobsmeyer, Chief Executive Officer
Dear Barbara and Members of the Board:
AREX Capital Management, LP and its affiliates
(together, “AREX” or “we”), are collectively the beneficial owners
of approximately 2.25 million shares of Enhabit, Inc. (“Enhabit” or
the “Company”), representing approximately 4.5% of the Company’s
common shares outstanding.
We have appreciated the conversations with you
over the past few weeks. We initially reached out to Enhabit’s
Board of Directors (the “Board”) to express our frustration with
the Company’s poor operational and share price performance, and to
offer suggestions that would benefit the Company and its
shareholders. We are pleased that the Board has begun interviewing
the two director candidates we suggested, and we are confident you
will find them highly qualified and additive to the Board’s skills
matrix. However, the broader issue of Enhabit’s future as a
standalone public company must be addressed.
For context, we have been Enhabit shareholders
since the Company’s spin-off from Encompass Health Corporation
(“Encompass”), and for more than a year prior to that we were
invested in the Company indirectly through our ownership of
Encompass shares. Throughout this period, we have remained
enthusiastic about the Company’s long-term prospects due to the
aging U.S. population and the increased incidence of clinical care
being provided in the home, a trend that is yielding improved
outcomes, greater patient satisfaction, and lower overall
costs.
Despite the Company’s secular growth opportunity
and attractive business model, Enhabit’s shares are down ~47% since
its spin-off from Encompass on July 1, 2022—and during that same
period, the S&P 500 and Russell 2000 indices have appreciated
by ~16% and ~11%, respectively.1 In fact, Enhabit’s shares have
underperformed all of the peer group members outlined in its recent
proxy statement. Although it is true that the home health and
hospice industries have recently faced unique regulatory and
operational challenges, Amedisys, arguably the public company most
similar to Enhabit, saw its shares decline by far less than
Enhabit’s over this period—even prior to Amedisys’ recent
M&A-driven increase. In our opinion, Enhabit’s poor share price
performance on both an absolute and relative basis is primarily
self-inflicted, as a surprisingly large number of missteps have
badly eroded confidence in management and contributed to a deeply
discounted valuation. In our experience, when such mistakes occur
early in a newly public company’s journey, it can be incredibly
difficult for that company to emerge from the “penalty box” with
investors—even with vastly improved execution over an exceedingly
long period.
At the same time, the secular trend towards
value-based care has substantially increased the strategic value of
home health businesses, as evidenced by Humana’s acquisition of
Kindred at Home, UnitedHealth’s acquisition of LHC Group, and most
recently by Option Care Health’s announced acquisition of Amedisys,
which was followed by an even higher bid from UnitedHealth. In
fact, once the Amedisys deal closes (with whichever suitor is
victorious), Enhabit will be the last remaining publicly traded
company focused primarily on home health, and our diligence
suggests that there are many market participants who would
logically have interest in acquiring Enhabit.
The recent M&A activity among Enhabit’s
peers illustrates the enormous potential returns to shareholders if
Enhabit were to pursue a sale. Just over a year ago, in March 2022,
UnitedHealth paid ~21x NTM EBITDA for LHC Group. And over the past
two months, both Option Care Health (in stock) and UnitedHealth (in
cash) have offered to buy Amedisys for ~15x NTM EBITDA.2 Applying
those multiples to consensus NTM EBITDA forecasts for Enhabit
yields a potential sale price range of $30-40 per share, more than
triple Enhabit’s current share price at the high end of the range.
Moreover, court filings have revealed that former CEO April Anthony
offered to acquire a majority of the Company at an enterprise value
of $3.6 billion in early January 2021 (prior to Enhabit’s
spin-off), a valuation that would imply a share price for Enhabit
of approximately $60. While there are various factors that could
make an acquisition multiple for Enhabit higher or lower than any
specific precedent, we believe that the likely involvement of
numerous large, well-capitalized potential buyers would cause a
sale process to be vigorous and competitive.
We are not privy to the details of the strategic
review that Encompass conducted that ultimately resulted in
Enhabit’s July 2022 spin-off. However, it is widely believed that
the Encompass board rejected bids dramatically above the Company’s
current valuation, and above even an optimistic view of where
Enhabit’s shares could trade in the foreseeable future as a
standalone company.
Enhabit’s Board, including the five former
Encompass directors that it still counts as members, has both the
opportunity and the responsibility to correct the mistake seemingly
made by the Encompass board. We believe Enhabit’s Board should
immediately commit to shareholders that it will commence a review
of strategic alternatives before the end of 2023, with an eye
towards a potential transaction closing shortly after the two-year
anniversary of the spin-off to avoid any tax complications. The
road to fully restoring an independent Enhabit’s credibility and
valuation is long, arduous, and fraught with operational, public
market, and other risks. Given Enhabit’s objectively challenged
execution and share price performance, the Board should fully
explore the potential delivery of substantial and fair value to
shareholders through a sale of the Company. We are highly confident
that a full and fair strategic alternatives review will make it
very clear to the Board that, as compared to the risks and
potential rewards inherent in the status quo, a sale is the obvious
way to maximize value for all shareholders.
We understand that in the very short term the
Company must consider spin-off tax rules and its Tax Matters
Agreement with Encompass, but we are certain that a review of
alternatives can be commenced within the time frame we described.
In the meantime, our director candidates are prepared to join the
Board where they could immediately provide valuable operational and
strategic insights and could later guide the Company through its
strategic alternatives review.
If the Board is unwilling to make this important
and appropriate commitment to shareholders, we will consider all
options at our disposal to ensure that shareholder value is
maximized and that the Board is held accountable.
Best regards,
Andrew RechtschaffenManaging Partner
James T. CorcoranPartner
About AREX
AREX Capital Management, LP is a value-oriented
investment firm based in New York City. AREX takes a long-term,
opportunistic approach to investing and focuses primarily on
publicly traded companies with significant, unrealized
potential.
Media Contact
Valerie Toomey, Chief Operating OfficerAREX Capital Management,
LP(646) 679-4000info@arexcapital.com
1 As of June 12, 2023.
2 UnitedHealth’s purchase price of $170.00 per
LHCG share implied an enterprise value of $6.0 billion, and
consensus NTM EBITDA for LHC Group at the time of announcement was
$281 million. Option Care Health’s announced acquisition price of
$97.38 per AMED share implied an enterprise value of $3.6 billion,
and consensus NTM EBITDA for Amedisys at the time of announcement
was $241 million. UnitedHealth’s bid of $100.00 per AMED share
implied a similar enterprise value.
A photo accompanying this announcement is available at
https://www.globenewswire.com/NewsRoom/AttachmentNg/5dea6925-8688-407e-8570-ef1bf4e5953c
A photo accompanying this announcement is available at
https://www.globenewswire.com/NewsRoom/AttachmentNg/a6e4c362-2f4b-4495-a7fb-d7607ca11c52
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