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NEW YORK (Reuters) – Hedge fund Arex Capital Management is urging Enhabit 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 (NYSE:EHC) Corp 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 (NYSE:UNH) bought LHC Group (NASDAQ:LHCG) for $5.4 billion earlier this year and Option Care Health (NASDAQ:OPCH) and UnitedHealth both offered to buy Amedisys (NASDAQ:AMED) 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.
