Spinoff Expert Sees Healthy Gains for Encompass
Jun 3, 2022
In December 2020, Encompass Health (EHC) announced it was exploring strategic alternatives for its home health and hospice business with the alternatives including a spinoff, sale, merger, or IPO, among others. A year later, Encompass announced in December 2021 it will perform a tax-free spinoff of the Home Health & Hospice Business, to be rebranded as Enhabit, Inc. (EHAB).
Enhabit — the spinoff company — is a high quality business. We believe that Enhabit should trade at a premium to its peers Pennant Group (PNTG), LHC Group (LHCG), and Amedisys (AMED), owing to its higher operating margin of around 19% compared to the peer average of around 10.3%. Post-spinoff, Encompass Health — the parent company — will be the market-leading inpatient rehab franchise (IRF). Due to the non-discretionary nature of several conditions treated in IRFs, EHC’s admission trends tend to be more stable than other sub-sectors of healthcare services, providing valuable revenue visibility and positive free cash flow assurance.
If we maintain our assumption of a 1:1 distribution ratio and assume a debt distribution ratio equal to the respective businesses’ EBITDA contributions, we believe Enhabit, the spinoff, will have a market cap of $1.2 billion. We anticipate potential upside for the combined pre-spin company, EHC, of 27% as a base case, and 52% in a more bullish scenario.