Aveanna, Advent International Reportedly Interested in Buying Encompass Health’s Home Health and Hospice Segment

Months of speculation finally ended in January when Encompass Health Corporation (NYSE: EHC) announced its home health and hospice segment would spin off as Enhabit Home Health & Hospice and become its own publicly traded company.

Or so it seemed.

At the end of February, Encompass Health opened the “sale or merger” door again, one almost everyone believed had been closed for good.

Now, it makes more sense why. On Friday, Reuters reported that there are multiple entities interested in buying the segment, including the private equity firm Advent International and the home health provider Aveanna Healthcare Holdings (Nasdaq: AVAH).

Reuters cited sources “familiar with the matter,” also adding that the segment could be worth “as much as $3 billion in a sale.”

“It’s kind of a unicorn. Where do you find a company of that size, with those standards of information reporting, armed with a talented executive leadership team?” Mark Kulik, managing partner of home health and hospice at The Braff Group, told Home Health Care News. “There’s just not that many companies like that ever on the market. … For all those reasons, a strong case could be made by both parties to make a run at Enhabit.”

Though home health agencies on the public market have gone through significant rough patches over the last two years from a stock-price standpoint, the industry as a whole continues to yield major returns in M&A deals.

It makes sense, then, that some would consider the price tag of the separated Enhabit Home Health & Hospice to be that high. The question always was whether Encompass Health could find a buyer willing to pay that price.

Without that buyer, a public spinoff made the most sense. With a buyer, however, a sale could unlock significant value to Encompass Health shareholders.

Overall, the Birmingham, Alabama-based Encompass Health’s footprint includes 145 hospitals, 251 home health locations and 96 hospice locations in 42 states and Puerto Rico. The rebrand to Enhabit is already underway at some of its home health locations.

Advent Capital already acquired AccentCare – one of the five largest home health providers in the country based on Medicare fee-for-service volumes – in 2019. Acquiring Enhabit could, in essence, pair two of the top home health and hospice providers in the country – an industry-shifting deal.

Specifically, based on LexisNexis data from 2020 on fee-for-service volume, that would pair the fourth and fifth largest home health providers in the U.S. together.

With the caveat that the LexisNexis data above is imperfect because it only takes into account fee-for-service Medicare data, those two companies together would create one of the three largest home health providers in the country based on national market share.

Additionally, the Dallas, Texas-based AccentCare merged with the Illinois-based Seasons Hospice & Palliative Care in late 2020. Prior to that deal, Seasons had also been one of the largest hospice providers in the country.

“On paper, all things look good. It makes sense and it’s an attractive acquisition target,” Kulik said. “But that’s kind of the easy part. The hard part is the culture part. How do you get those companies to merge together and work in harmony and not be resistant to change or consolidation? That’s the tough part, especially for a company this size.”

Aveanna, on the other hand, is an emerging behemoth in home health care. Since it went public last year, the company has shifted its focus from pediatric home health to more traditional, senior-based home health care services.

According to Reuters, Aveanna currently has a market cap of “about $745 million,” which would mean it would need help from others – including top shareholders such as the private investment firm Bain Capital – to get a deal done for Enhabit.

“Aveanna is public already, and on the opposite side of the coin with Enhabit and Encompass, you’ve got a company that’s already compliant with all the rigors of being a public company,” Kulik said. “You’ve got the standards, you’ve got the reporting timeline, you’ve got all the internal rigors that are established. That’d be a natural combination between the two. Just from an operational perspective, there’d be really no skipping a beat there.”

Bain Capital has made an array of home-based care investments in the past, including in Aveanna. Aveanna’s board includes multiple members of the Bain Capital team.

Aveanna wants to be one of the largest, if not the largest, home health care providers in the U.S. It’s already gotten the M&A engine rolling in its effort to become diversified – both from a payer source standpoint and a demographics one – but its leaders have always been clear about the larger goals they ultimately have set for the company.

“We’re going to continue to do what we’ve always done — and that is build a very successful home care company, one that is diversified and different from our peers,” Rod Windley, Aveanna’s chairman, told HHCN last July. “And one that will be here for years to come. We don’t have our sights set on being a $2 billion company. Our appetite for growth is much, much larger than that, and we think that there’s plenty of runway going forward.”

After Encompass Health initially made its plans clear to spinoff Enhabit Home Health & Hospice, it did have some pushback from some of its own shareholders.

The activist investment firm Jana Partners, in particular, wanted Encompass Health “to re-engage with interested third parties on a potential merger for its home health and hospice business” before executing the anticipated spinoff. The firm owns more than 2% of Encompass Health.

Again, without the right deal out there, it was likely not an option no matter how much pushback Encompass Health got.

But with large, capital-strapped players such as Advent International and Bain Capital involved – as well as established home health care entities like AccentCare and Aveanna – things change considerably.

The initial plan was for Encompass to be its own publicly traded entity by the second quarter of 2022. As that time frame rapidly approaches, Encompass Health’s board will have to make some very tough decisions.

No matter what the decision is, it will have an impact on the home health industry. The question now is whether that will be a relatively minor one or a groundbreaking and major one.