Enhabit Sale Rumors Raise Questions, Place Potential Buyers at Defining Crossroads

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Earlier this week, a report surfaced claiming that Advent International, Aveanna Healthcare Holdings (Nasdaq: AVAH) and at least a few other companies have “expressed interest” in acquiring Enhabit Home Health & Hospice, the $1.1 billion business currently belonging to Encompass Health Corporation (NYSE: EHC).

Executives from the Birmingham, Alabama-based Encompass Health have repeatedly stood behind a plan to spin off Enhabit into its own publicly traded entity, though they did recently signal a willingness to entertain any “value-creating strategic opportunities” that popped up during the separation process.

At this point, I believe it’s unlikely that an industry-shaping transaction will materialize because of timing, costs and the current home health operational challenges. If Encompass Health did sell Enhabit, however, it would undoubtedly have a transformational effect on the buyer, particularly in terms of added patient volume and clinical capacity.

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Here are a couple of key points that help explain why:

– In 2021, the Encompass Health segment had 200,600 total home health admissions and 13,100 hospice admissions. A purchase would dramatically add volume for any acquirer.

– At the end of the fourth quarter, the segment had about 10,900 employees across the home health and hospice service lines. For strategic buyers, the chance to reinforce existing staffing levels with thousands of highly trained clinicians is arguably the most attractive aspect of an acquisition.

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– Geographically, Encompass Health has 251 locations in 34 states, with 96 hospice locations in 22 states; several markets have co-located home health and hospice operations as well. With such a large footprint, a potential deal would instantly give a buyer more density, an advantageous factor when it comes to local referral relationships.

In this week’s exclusive, members-only HHCN+ Update, I follow up on the Enhabit news and explore what a mega-deal would mean for either Aveanna or Advent International, the private equity firm that owns post-acute care giant AccentCare Inc. Additionally, I explain why a potential Enhabit acquisition places home health buyers at a defining crossroads they can’t ignore.

Why a deal makes sense for Aveanna

Led by home health veterans Rod Windley and Tony Strange, the Atlanta-based Aveanna has been targeting Medicare-reimbursed home health and hospice opportunities ever since it filed the paperwork to go public in April 2021.

“We believe that we have the opportunity to leverage our national home health infrastructure to develop an industry leading adult home health and hospice business similar in size and scale to our pediatric home health business,” the company wrote in an S-1 financial filing.

Aveanna made serious progress on that goal last year, completing multimillion-dollar acquisitions for Comfort Care and Accredited Home Care post-IPO, also buying Doctor’s Choice shortly before its public debut. Yet as of 2021’s third quarter, the business was still skewed toward private-duty services.

The overall Aveanna business has 263 locations in 30 states, according to the company’s Q3 2021 supplemental information.

Its private-duty services segment, which normally has around 29,000 patients on service, accounts for 185 locations in 22 states. In comparison, Aveanna’s home health and hospice segment is made up of 65 locations in 15 states, with 13,200 patients on service.

Most of the home health and hospice centers are clustered in the Upper Midwest, Southeast and Mid-Atlantic region.

A quick side-by-side comparison with Enhabit’s home health and hospice network shows just how advantageous a deal could be for Aveanna. By theoretically adding Enhabit’s locations, Aveanna would create density in the Southeast while expanding in several Western states.

The main barrier to swinging a deal would likely be Enhabit’s asking price, with Reuters reporting that the business could be worth as much as $3 billion in a sale.

Aveanna has a market capitalization of $745 million, according to this week’s report. The provider’s supplemental information noted that it finished Q3 2021 with $122 million cash on its balance sheet, with an undrawn revolver of around $180 million in borrowing capacity and $200 million more for M&A under a delayed draw term loan.

Enhabit would be a mouthful of a transaction, but Aveanna’s leadership has previously touted a serious appetite for growth.

“We don’t have our sights set on being a $2 billion company,” Windley, Aveanna’s chairman, told HHCN last summer. “Our appetite for growth is much, much larger than that, and we think that there’s plenty of runway going forward.”

An angle for Advent, AccentCare

In May 2019, AccentCare was acquired by Advent International, a large and extremely active global PE investor. Advent was also singled out as an interested Enhabit suitor this week.

While the PE giant wouldn’t necessarily have to merge Enhabit and AccentCare’s operations, doing so would make the most sense and likely lead to ample operational synergies. AccentCare is already the fifth-largest home health provider and the fifth-largest hospice provider in the U.S., so a play for Enhabit almost feels like another “merger of equals,” similar to when LHC Group Inc. (Nasdaq: LHCG) combined with Almost Family in 2018.

LexisNexis data has Encompass Health’s home health business as the fourth-largest operation in the U.S.

AccentCare operates over 270 sites of care across 31 states, employing more than 31,000 in-home care professionals. While Aveanna’s home health and hospice locations are clustered in a few regions, AccentCare has offices spread out fairly evenly across the U.S., apart from a handful of states in the Eastern half of the country and the Great Plains.

Strategically, AccentCare prizes density in urban markets with a strong health system presence, CEO Steve Rodgers told me during a recent HHCN+ TALKS appearance.

“We do want to operate with size, scale and density in the marketplaces that we operate in. We’re very focused on larger urban marketplaces,” Rodgers said. “We anchor, like I said before, into these partnerships within those markets, then look to offer a continuum of care across them.”

If Advent bought Enhabit, it would certainly bring additional volume, clinical resources and technology capabilities into the AccentCare family. But ultimately, I don’t believe an AccentCare-Enhabit enterprise would offer the same kind of geographic upside as an acquisition would for Aveanna.

Another factor complicates a hypothetical deal, in my view.

AccentCare has over the past couple of years completed four major integrations, including Seasons Hospice & Palliative Care, while also bringing together five EMR systems. The Dallas-based provider has been so active on the M&A front over the years, acquiring so many different brands, that it actually announced a company-wide branding initiative in January to get all of its employees on the same page.

“This is about so much more than our brand,” Rodgers told me at the time. “It’s about who we want to be as an organization and about aligning our people around that. And it’s about how we face the marketplace.”

If AccentCare is trying to build a sense of unity across its operations, the timing of an Enhabit deal may not be quite right.

Time to choose

It’s important to note that Reuters did suggest other suitors from Advent and Aveanna are interested in Enhabit, though it only singled out the latter two, citing sources familiar with the matter.

Regardless of who the actual suitors are, considering Enhabit puts prospective buyers at a crossroads that will define them for the next few years.

A capital-intensive purchase of Enhabit will strain resources and lead to a lengthy integration process, but it would bring accelerated growth and clinical capacity at a time when labor shortages aren’t projected to drastically improve.

On the other hand, smaller add-on deals may make more sense at this point than a transformational transaction.

Once the public health emergency (PHE) expires and COVID-era financial lifelines are depleted, many home health and hospice executives expect a wave of industry consolidation. The return of the 2% Medicare sequestration cut will also strain some home health and hospice operators.

Recently, one post-acute care analyst told me he expects buyers to be able to acquire smaller agencies for “pennies on the dollar.”

I believe a methodical add-on M&A strategy currently makes sense for larger home health and hospice providers. A blockbuster for Enhabit, in contrast, seems like the best option for a strategic buyer with limited or nonexistent home health or hospice service lines – or a PE investor looking to get in the space for the first time.

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