Ideas Elsewhere: Enhabit (EHAB)

Activist Campaign

Clark Street Value has recently highlighted an interesting ‘activist campaign/proxy fight’ situation at Enhabit (EHAB). It’s a $413m market cap home health and hospice care provider that launched a strategic review back in Aug’23 after facing pressure from activist investor hedge fund Arex Capital Management (owns 4.8%). Last week, EHAB concluded the strategic review without a transaction, announcing intentions to continue as a standalone company. This has prompted the activist Arex to launch a proxy fight, nominating its slate of directors to EHAB’s board with a focus on restarting the sale process while also pursuing operational improvements. While it is not clear how the situation will eventually unfold, several aspects give some confidence in a favorable outcome for EHAB equity holders:

• Arex is a long-only fund run by former executives of high-profile activist firms (Greenlight Capital and JANA Partners). EHAB is the the largest position of the fund (36% of the portfolio as of Dec’23).
• EHAB is one of the few remaining standalone public companies in the home health and hospice care industry. The space has seen significant consolidation in recent years, including UnitedHealth’s acquisitions of LHCG and AMED.
• As part of EHAB’s spin-off from Encompass Health in Jul’22, EHAB was subject to a two-year safe harbor waiting period whereby an acquisition of the company during this period might have voided the spin-off’s tax-free status, potentially resulting in significant tax liabilities. This has likely restricted some of the industry players from being considered as potential acquirers in the just-concluded strategic review. The expiration of the safe harbor waiting period in Jul’24 might open the doors for a higher number of interested parties and might pave the way for the sale of EHAB without risking the tax-free spin-off status.

There seems to be substantial headroom for a potential acquisition offer above the current share price levels. EHAB is currently trading at an undemanding 9.3x 2024E EBITDA, substantially below publicly-listed competitor ADUS (13.2x) and UNH’s recent acquisitions of AMED (15.5x) and LHCG (21.4x).

Note: The ‘Ideas Elsewhere’ section is intended to highlight interesting event-driven investment ideas by other authors. These ideas are not my own, and I am simply summarizing them to bring the attention of SSI subscribers. I might not actively follow the developments of these ideas, so there might be limited updates or follow-ups in the comments section.