AREX Capital Issues Letter to Board of Directors of Enhabit, Inc.
14 August 2023 - 11:00PM
AREX Capital Management, LP, together with its affiliates, the
owners of approximately 4.7% of the shares of Enhabit, Inc. (NYSE:
EHAB) (the “Company”), today issued an open letter to the Company’s
Board of Directors.
The full text of the letter is set forth
below:
August 14, 2023
Via Electronic Mail
The Board of DirectorsEnhabit, Inc.6688 N. Central
ExpresswaySuite 1300Dallas, TX 75206
Attention: Barbara A. Jacobsmeyer, Chief Executive Officer
Dear Barbara and Members of the Board:
AREX Capital Management, LP and its affiliates
(together, “AREX” or “we”), are collectively the beneficial owners
of approximately 2.4 million shares of Enhabit, Inc. (“Enhabit” or
the “Company”), representing approximately 4.7% of the Company’s
common shares outstanding.
We were pleased that the Company announced last
week that it intends to launch a strategic alternatives process
upon receiving a tax opinion that such action would not jeopardize
the tax-free treatment of Enhabit’s spin-off. Based on our
extensive discussions with tax counsel and our experience investing
in spin-offs, we are confident that this opinion can be obtained
promptly. We eagerly await the Company’s confirmation that it has
received the requisite tax opinion and has formally launched a
strategic alternatives process over the next few weeks. We will
view any delay with severe skepticism.
We were simultaneously disappointed by Enhabit’s
second quarter performance and revised 2023 outlook. In addition to
the issues that the Company has been encountering operationally, we
were again struck by the magnitude of its unallocated home office
expenses, which are now roughly equivalent to its overall EBITDA
guidance. While we do not intend to discuss the Company’s
consistently underwhelming results or investor communications here,
it seems manifestly clear that the appropriate path forward for the
Company is a sale.
Shareholders must have full confidence in
Enhabit’s Board of Directors (the “Board”) to conduct a fulsome,
robust, and value-maximizing strategic alternatives process.
Candidly, we do not believe that the Board, as currently
constituted, enjoys such confidence. While there is no reason to
relitigate the circumstances that resulted in Enhabit’s spin-off,
there was a perception at that time that the Encompass board was
reluctant to sell Enhabit. We cannot help but observe that five of
those same Encompass directors are now on Enhabit’s Board. This
lingering perception, along with the Company’s overall poor
performance since it became a standalone public company, has raised
legitimate shareholder concerns about the effectiveness of the
Board and whether it is truly focused on fulfilling its fiduciary
obligations. Such sentiment adds unhelpful uncertainty to a
strategic alternatives process.
In the same vein, we were disappointed when the
Company recently informed us that it would not be accepting either
of our proposed directors, and that it did not anticipate adding
any in the near future. We presented the Company with two skilled
healthcare executives with direct insight into working with
payers—one of whom has broad home health operations experience—and
yet our highly qualified candidates each received a single
perfunctory interview with a third-party recruiter. In fact, we
doubt that they were ever given serious consideration. The Company
is correct that there should be no net additions to its Board, as
Enhabit already carries a bloated home office cost burden and has
too many directors for a company of its size.1 However, in light of
shareholder apprehension concerning the Board as well as the
Company’s commitment to replace at least four of the legacy
Encompass directors by the 2024 Annual Meeting of Stockholders, we
are shocked by the Board’s unwillingness to accelerate its
transition by adding two directors who would contribute valuable
operational perspective during the strategic alternatives
process.
As the Company embarks upon this critical
journey to realize Enhabit’s considerable strategic value, we
believe that the Company should take steps to bolster shareholder
confidence in the Board. One obvious solution would be the
acceleration of the legacy Encompass director retirements, which
would help to alleviate any investor concerns that the
disappointing reasoning or outcome associated with the Encompass
process might reappear. While our director candidates could
immediately add value and should be considered as replacements, it
is not essential that the legacy Encompass directors be replaced,
as an eight-person Board seems more appropriate for a company of
Enhabit’s size and might facilitate better decision-making during
the strategic alternatives process.
In closing, we applaud the Board’s decision to
initiate a strategic alternatives process, and we are confident
(and believe that other investors concur) that Enhabit’s strategic
value significantly exceeds its current valuation. Moreover, our
diligence suggests that there are many well-capitalized strategic
and financial buyers interested in acquiring the Company. It seems
to us that the only way that shareholders might not realize this
strategic value would be if the process were not conducted in an
appropriate and sincere manner. If this happens, and if the process
fails to yield the proper outcome for shareholders, we will review
all options at our disposal to ensure that the Board is held
accountable.
Best regards,
Andrew RechtschaffenManaging Partner
James T. CorcoranPartner
About AREX
AREX Capital Management, LP is a value-oriented
investment firm based in New York City. AREX takes a long-term,
opportunistic approach to investing and focuses primarily on
publicly traded companies with significant, unrealized
potential.
Media Contact
Valerie Toomey, Chief Operating OfficerAREX Capital Management,
LP(646) 679-4000info@arexcapital.com
1 According to the EY Center for Board Matters, the average
S&P SmallCap 600 company has 8.9 directors.
Photos accompanying this announcement are available at:
https://www.globenewswire.com/NewsRoom/AttachmentNg/a6e4c362-2f4b-4495-a7fb-d7607ca11c52
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