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Enhabit's numbers lay groundwork for future independence

Michael Flaherty
Jun 8, 2022

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Encompass Health lowered its FY 2022 outlook yesterday and offered financial figures for its home health and hospice care business that came in on the lighter side than some analysts had expected.

Why it's the BFD: The home health unit, known as Enhabit, is set to be spun off by Encompass in July. If the division, with an estimated EV of more than $2 billion, comes out of the spin gates not delivering on key metrics and trading down, it could become an M&A target, Axios reports.

Flashback: Encompass has been the target of activist hedge fund Jana Partners, which campaigned late last year to push the company into separating its home health division via a "spin-merge" with a private company.

State of play: Encompass opted for a straight spinoff instead.

  • Suitors interested in buying the home health unit outright also emerged during the company's review, a source close to the situation tells Michael.
  • Considering how aggressive UnitedHealth's Optum has been on the M&A front, and its recent $5.4 billion wager for LHC, one could assume it was among those that kicked the tires.

The bottom line: Spincos that underperform are extra vulnerable to an opportunistic buyer. Advisers usually say a spinco needs to wait two years before it can be acquired, but that IRS-related rule has changed over the years, and that rule of thumb is not set in stone.

  • Encompass yesterday said Enhabit's EBITDA this year would come in between $165 million and $185 million. Research firm Gordon Haskett points out that two analysts expected the figure to be above $200 million.
  • If Enhabit performs well as a publicly traded company, its valuation will rise and soar out of reach of a buyer. If it doesn't, it could end up like LHC.
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