Derivation or merger: making sense of Encompass Health options

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Activist investment firm Jana Partners has reportedly urged Encompass Health Corporation (NYSE: NYSE) to reconsider its plans to transform its home health and hospice care segment into a new public entity. Instead, Jana wants the Birmingham, Alabama-based company to revert to a possible merger with a third party.

According to market experts, there are hypothetical pros and cons to both a public split and a merger with another organization.

However, one of these strategies is probably more realistic than the other.

“[With a spinoff], you are not at the mercy of a tendering process and you are not waiting for buyers to show up, ”Brian Tanquilut, Jefferies Health Services Analyst, told Home Health Care News . “It’s an easy, foolproof way to affect the separation of the two companies and hopefully realize some of the value trapped in being together.”

Encompass Health’s home health and hospice segment is made up of nearly 350 locations in 34 states, with the bulk of these being on the home health side. Overall, the segment generates approximately $ 1.1 billion in annual revenue, with approximately 158,300 home care admissions per year and approximately 13,200 palliative care admissions per year.

In addition to the home care and hospice segment, Encompass has a network of 145 inpatient rehabilitation hospitals. With annual sales of approximately $ 3.9 billion, this makes the company the largest owner and operator of such facilities in the United States.

In 2020, Encompass Health executives said they were exploring strategic alternatives to maximize the value of its home care and palliative care segment. In October, they said a state-owned spinoff was the best way to achieve this.

This is not a rarely used strategy, with another recent example being The Ensign Group (Nasdaq: ENSG) which has transformed its home health care, palliative care and senior living segment into The Pennant Group ( Nasdaq: PNTG).

“Executing a spin-off is not a one-size-fits-all strategy, as many somewhat diverse, large-cap companies have executed spin-offs,” Les Levinson, co-chair of the Transactional Healthcare practice, told HHCN. at Robinson & Cole LLP. “The main reason for doing it is that you feel there is value that is locked into the larger structure of the business. And by spinning and swapping it on its own, that value will be appreciated more as pure play than being mixed with other lines of business. “

Indeed, one advantage of the spin-off is that it does not have to find a third party purchaser or merger partner. Another benefit is bypassing the onboarding process – and any personnel hurdles that may arise.

A spin-off company usually comes with more control, leaving the fate of the separate business in the hands of its existing decision-makers, who are intimately familiar with all the challenges and the inner workings of the business.

Encompass Health began appointing executives for its home and hospice care segment in June, announcing Barb Jacobsmeyer and Crissy Carlisle as new CEOs and CFOs, respectively.

“They’ve already put in place a new management team for the company, so that definitely helps,” Tanquilut said.

One downside to a potential spin-off is that the separate company just doesn’t work out as expected, or the investment community just doesn’t rally to it.

Another downside is missing out on the synergistic benefits associated with a merger or combination, Levinson explained.

Jana, according to Reuters, is in favor of mergers because she sees a combination with another player in the industry as a way to better manage difficult operational conditions, including a shortage of nurses.

“By aligning or combining with another entity that is also in your space, you can create certain synergies,” Levinson said. “Market penetration, other intangibles that might not be fully appreciated if you just do it on your own, in a way that competes with the rest of the universe.”

When it comes to a merger or sale with a third party, these options could create more instant value for Encompass Health shareholders – if there is an interested buyer who makes an attractive deal.

The problem with this scenario, however, is that there aren’t many home health players who could close a deal for an asset the size of Encompass’s home health and hospice segment. Health. And like Encompass Health, most publicly traded home care companies have seen their stock prices drop somewhat.

“Everyone has seen their actions retreat quite significantly,” Tanquilut added. “Their ability to acquire an asset like Encompass, this assessment which would be convincing for the board of directors, has been impaired in a way, due to the decline of the respective stocks. I think it’s just more difficult to complete a sales process, an assessment than the board would want.

Last April, reports revealed that representatives of Encompass Health were spotted in Rhode Island, the headquarters of CVS Health (NYSE: CVS), leading some to believe that CVS was positioning itself for a health move to residence.

There have been no further Encompass Health-CVS reports since.

Encompass Health has said it plans to execute a spin-off in the first half of 2022.


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