AREX Capital Management, the owners of approximately 4.5% of the shares of Enhabit, issued an open letter to the Company’s Board of Directors, which read in part, “We have appreciated the conversations with you over the past few weeks. We initially reached out to Enhabit’s Board of Directors to express our frustration with the Company’s poor operational and share price performance, and to offer suggestions that would benefit the Company and its shareholders. We are pleased that the Board has begun interviewing the two director candidates we suggested, and we are confident you will find them highly qualified and additive to the Board’s skills matrix. However, the broader issue of Enhabit’s future as a standalone public company must be addressed….Despite the Company’s secular growth opportunity and attractive business model, Enhabit’s shares are down ~47% since its spin-off from Encompass on July 1, 2022-and during that same period, the S&P 500 and Russell 2000 indices have appreciated by ~16% and ~11%, respectively.1 In fact, Enhabit’s shares have underperformed all of the peer group members outlined in its recent proxy statement. Although it is true that the home health and hospice industries have recently faced unique regulatory and operational challenges, Amedisys, arguably the public company most similar to Enhabit, saw its shares decline by far less than Enhabit’s over this period-even prior to Amedisys’ recent M&A-driven increase. In our opinion, Enhabit’s poor share price performance on both an absolute and relative basis is primarily self-inflicted, as a surprisingly large number of missteps have badly eroded confidence in management and contributed to a deeply discounted valuation. In our experience, when such mistakes occur early in a newly public company’s journey, it can be incredibly difficult for that company to emerge from the “penalty box” with investors-even with vastly improved execution over an exceedingly long period. At the same time, the secular trend towards value-based care has substantially increased the strategic value of home health businesses, as evidenced by Humana’s acquisition of Kindred at Home, UnitedHealth’s acquisition of LHC Group, and most recently by Option Care Health’s announced acquisition of Amedisys, which was followed by an even higher bid from UnitedHealth. In fact, once the Amedisys deal closes, Enhabit will be the last remaining publicly traded company focused primarily on home health, and our diligence suggests that there are many market participants who would logically have interest in acquiring Enhabit… We are not privy to the details of the strategic review that Encompass conducted that ultimately resulted in Enhabit’s July 2022 spin-off. However, it is widely believed that the Encompass board rejected bids dramatically above the Company’s current valuation, and above even an optimistic view of where Enhabit’s shares could trade in the foreseeable future as a standalone company…We believe Enhabit’s Board should immediately commit to shareholders that it will commence a review of strategic alternatives before the end of 2023, with an eye towards a potential transaction closing shortly after the two-year anniversary of the spin-off to avoid any tax complications. The road to fully restoring an independent Enhabit’s credibility and valuation is long, arduous, and fraught with operational, public market, and other risks. Given Enhabit’s objectively challenged execution and share price performance, the Board should fully explore the potential delivery of substantial and fair value to shareholders through a sale of the Company. We are highly confident that a full and fair strategic alternatives review will make it very clear to the Board that, as compared to the risks and potential rewards inherent in the status quo, a sale is the obvious way to maximize value for all shareholders. We understand that in the very short term the Company must consider spin-off tax rules and its Tax Matters Agreement with Encompass, but we are certain that a review of alternatives can be commenced within the time frame we described. In the meantime, our director candidates are prepared to join the Board where they could immediately provide valuable operational and strategic insights and could later guide the Company through its strategic alternatives review. If the Board is unwilling to make this important and appropriate commitment to shareholders, we will consider all options at our disposal to ensure that shareholder value is maximized and that the Board is held accountable.”
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