Enhabit Inc. (NYSE: EHAB), one of the largest freestanding home health and hospice companies in the market, intends to launch a strategic review process that could ultimately end in another industry-shaping transaction.
The Dallas-based Enhabit announced Wednesday in its second-quarter earnings results that it is getting ready to explore all options for the future of the company in order to satisfy the conditions of its Tax Matters Agreement with Encompass Health Corp. (NYSE: EHC). Enhabit spun off from Encompass Health as its own publicly traded entity in July 2022.
“The conditions in the TMA include 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 the spin-off of Enhabit,” Enhabit wrote in Wednesday’s financial results.
Overall, Enhabit provides home health and hospice services across 255 home health locations and 108 hospice locations across 34 states.
Externally, the notion of a strategic review comes as Enhabit’s peers, LHC Group and Amedisys Inc. (Nasdaq: AMED), emerge from and enter into new chapters of their own in their respective company histories. Enhabit, LHC Group and Amedisys have historically been three of the largest five home health providers in the nation.
LHC Group was acquired by UnitedHealth Group’s (NYSE: UNH) Optum for $5.4 billion in February.
Amedisys and Optum are currently working through a planned acquisition in which Optum buys Amedisys for $3.7 billion in an all-cash deal.
Internally, discussions regarding a strategic review come as Enhabit makes progress negotiating new Medicare Advantage (MA) contracts and shifting a larger percentage of its visits into non-episodic payer innovation contracts at better rates. Enhabit additionally continues to make headway on its workforce initiatives while adding de novo locations, according to the company.
But that progress has not come fast enough for some.
“EHAB’s Q2 and YTD results are disappointing,” an analyst note from the financial services firm Jefferies reads. “While [management] has succeeded in winning new MA contracts that reimburse at more reasonable/profitable rates and presumably will bring more volume as they ramp over the next few months, the shift in EHAB’s business to incorporate more non-Medicare business has not gone smoothly.”
Enhabit reported a net service review of $262.3 million in 2023’s second quarter, with a net loss of $74.1 million. Home health revenue fell to $213.8 million in Q2 of this year, down 2.9% compared to $220.2 million during the same period last year.
Broadly, a Tax Matters Agreement is a type of understanding between a parent company and new spinoff entity, typically for financial- or tax-reporting purposes.
“Upon satisfaction of these conditions, the Enhabit board, with the assistance of independent advisors, intends to launch a strategic alternatives process,” Enhabit wrote in its financial results. “As part of any such process, the board expects it would consider a wide range of options for the company including, among other things, a potential sale, merger or other strategic transaction.”
Additional information may come on Thursday when Enhabit holds its scheduled second-quarter conference call to discuss its financial performance.
“There can be no assurance that the conditions in the TMA will be satisfied, that Enhabit will initiate such a process, or if launched, that a process would result in Enhabit pursuing a particular transaction or other strategic outcome,” the company continued.
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