There may soon be a major shakeup in the home health and hospice markets.
Encompass Health Corp. (NYSE: EHC) announced Tuesday it is “exploring strategic alternatives” for its home health and hospice business, which brought in total segment revenue of $274.5 million in the third quarter of 2020 and $1.09 billion in all of 2019, according to company financial filings.
The Birmingham, Alabama-based Encompass Health currently ranks as the fourth-largest home health provider in the nation, LexisNexis data suggests. Overall, its U.S. footprint includes 242 home health locations and 83 hospice locations.
“Since joining together with Encompass Home Health and Hospice in 2015, we have generated substantial growth in both our business segments, and we continue to deliver high-quality, cost-effective, integrated care to a growing number of our patients,” President and CEO Mark Tarr said in a statement.
The company is considering “a range of options” for its home health and hospice business, including a full or partial separation from Encompass Health through an initial public offering, spin-off, merger, sale or other transaction.
Tuesday’s news has apparently been in the works for a while, as Encompass Health’s board of directors has been evaluating an array of alternative strategies and structures for some time. The board has elected to make an official announcement as it proceeds with a more formalized process, the company noted.
No timetable has been established for the completion of the strategic review. Encompass Health does not intend to disclose further developments with respect to its strategic review process.
Encompass Health may be open to offloading it’s home health and hospice business, but those who follow the company shouldn’t view the move as a sign that things aren’t working out, according to William Blair analyst Matt Larew. In fact, Encompass Health’s ability to pair home-based care with its robust in-patient rehabilitation facility (IRF) business has mostly been a success story, reflected in a clinical collaboration rate that has grown from 18.5% in 2015 to more than 35% last year.
“The strategy in terms of building a coordinated post-acute care provider — that is, with IRF, home health and hospice — I think has actually been successful,” Larew said during the Home Health Care News Capital+Strategy event. “I think Encompass Health has done a really nice job.”
Instead, the decision to explore strategic alternatives is likely more about maximizing the value of the home health and hospice business. As currently structured, Encompass Health is undervalued on a sum-of-all-parts basis.
“If you look at the peer valuations in the market, … there’s obviously a big discrepancy between the value the market is willing to give Encompass Health for the portion of home health and hospice as a business relative to [others],” Larew added.
In other words, spinning off home health and hospice services could unlock trapped value for Encompass Health’s shareholders. That’s an important consideration that all publicly traded companies need to weigh.
Broadly, Encompass Health’s home health peers are currently trading at an average 2021 EBITDA multiple of roughly 25 times, according to a William Blair note shared with HHCN. Facility-based peers are trading at an average multiple of just 8 times.
Encompass, with approximately 25% of EBITDA generated from home health and hospice, is trading at roughly 12 times 2021 EBITDA.
“I don’t think [this is] a sign that this strategy failed from a business and delivering-value-to-patients standpoint,” Larew said.
If Encompass Health does decide to spin off its home health and hospice business, it would be the second such move in the past two years.
In May 2019, San Juan Capistrano, California-based The Ensign Group Inc. (Nasdaq: ENSG) unveiled plans to spin off its home health, hospice and senior living businesses into The Pennant Group (Nasdaq: PNTG), a separate publicly traded company. At the time, it was again couched as a strategic play to unlock shareholder value and clearly draw a line between two very different industries.
Today, Ensign is primarily an operator of skilled nursing facilities (SNFs). Its portfolio includes more than 228 properties across 12 states, with its latest deal being a takeover of the Hays Nursing and Rehabilitation Center in Texas.
“There are people that don’t really like our profession, that don’t like our industry — and they like our model and they like the results we achieve,” former Ensign CEO Christopher Christensen said last year. “This [spin-off] gives them a chance to invest in Ensign and what we believe in and how we operate and the fundamentals and the way we acquire — the contrarian acquisition model we tend to follow. It gives them a chance to do that without necessarily coming into an industry that they’re uncomfortable with.”
The Pennant spin-off was finalized in October 2019. Year to date, Pennant’s stock value is up by more than 73%.
Around the time of the Pennant news, some industry insiders even believed that Brookdale Senior Living Inc. (NYSE: BKD) would eventually look to cash in on its home health and hospice business. While Brookdale’s home health business has slightly recovered from a couple of down quarters, its hospice service line has largely thrived.
If Encompass Health didn’t want to separate itself from its home health and hospice segment via an IPO, spin-off, merger or similar move, an alternative would be pursuing a major M&A deal or series of acquisitions, the note from William Blair pointed out.
HealthSouth Corporation (NYSE: HLS) first agreed to acquire privately held EHHI Holdings Inc. — the original owner of Encompass Home Health and Hospice — back in 2014 for about $750 million.
As that deal came together, both parties felt that Encompass should continue operating with a certain degree of autonomy.
“One of the most important requirements of this transaction for me and [CEO April Anthony] was that Encompass would become a subsidiary of HealthSouth, but would maintain its identity, its corporate headquarters, its senior management team, its corporate culture and its focus on quality,” HealthSouth’s Jay Grinney said at the time.
HealthSouth formally changed its name to Encompass Health Corp. in 2017.
“This name change and rebranding initiative reflect our expanding national footprint and the strategy we are pursuing to deliver high-quality, cost-effective care across the post-acute continuum,” current Encompass Health CEO Mark Tarr said at the time. “The name ‘Encompass Health’ signals our commitment to creating a seamless system where high-quality care is coordinated by clinical teams across the inpatient and home settings.”
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