Arex Capital pushes Enhabit to consider company sale - letter

Encompass Health

13/06/2023 13:00

By Svea Herbst-Bayliss
       NEW YORK, June 13 (Reuters) - Hedge fund Arex Capital
Management is urging Enhabit  EHAB.N  to put itself up for sale
and wants the home health and hospice provider to begin a
strategic review to help reverse a 50% slide in its share price,
according to a letter seen by Reuters.
    Enhabit is already interviewing two board directors proposed
by Arex, which owns a 4.5% stake in the company, but the hedge
fund wants more drastic action as the share price has been cut
nearly in half since it went public a year ago.
    "The Board should fully explore the potential delivery of
substantial and fair value to shareholders through a sale of the
Company," Arex wrote in the letter to Enhabit's chief executive
officer and board.
    "Compared to the risks and potential rewards inherent in the
status quo, a sale is the obvious way to maximize value for all
shareholders," Andrew Rechtschaffen, Arex' managing partner, and
James Corcoran, a partner, wrote.
    Enhabit was spun off from post-acute healthcare services
provider Encompass Health Corp  EHC.N  on July 1, 2022 and since
then its shares have dropped 47%, compared with a 16% gain in
the S&P 500 index and an 11% increase in the Russell 2000 index.
    Since January the share price has fallen 7% to close at
$12.11 on Monday, valuing the company at $606.7 million.
    The letter dated June 13 nevertheless struck a conciliatory
tone. Arex said it appreciated the conversations with the
company over the past weeks and was happy the company was
assessing its proposed director candidates, whom it said could
add operational and strategic knowledge that could be helpful
during a review. It did not identify the candidates.
    Enhabit has 13 directors, including two newcomers who joined
in March after a settlement with two investment firms.
    A representative for Enhabit was not immediately available
for comment.     
    Missteps have undermined confidence in management and
contributed to Enhabit's "deeply discounted valuation," the
letter said, adding it may be "incredibly difficult" for a newly
public company to exit the "'penalty box' with investors." 
     Arex remains optimistic about Enhabit's long-term prospects
given an aging population and trend toward providing clinical
care at home and said a sale could be very lucrative.
    Enhabit may be the last publicly traded company focused
mostly on home health and would be an attractive target as the
pace of mergers and acquisition in the sector is high, Arex
wrote. UnitedHealth  UNH.N  bought LHC Group for $5.4 billion
earlier this year and Option Care Health  OPCH.O  and
UnitedHealth both offered to buy Amedisys  AMED.O  which will be
bought by Option Care for $3.6 billion.
    Enhabit could fetch a "potential sale price range of $30-$40
per share, more than triple Enhabit's current share price," the
letter said.
    Arex wants the company to commit immediately to start a
review before the end of the year and close any potential
transaction after the two-year anniversary of the spinoff to
avoid tax complications.
    Pressure from Arex illustrates how investors remain unhappy
with the company even after it settled with Cruiser Capital and
Harbour Point Capital Management in March to refresh the board
by adding two new directors who have experience in healthcare
consulting and information technology. 
    

 (Reporting by Svea Herbst-Bayliss; Editing by Sonali Paul)
 ((svea.herbst@thomsonreuters.com; +617 856 4331; Reuters
Messaging: svea.herbst.thomsonreuters.com@reuters.net))