AREX Capital Management issues letter to board of directors of Enhabit

AREX Capital Management, LP, together with its affiliates, the owners of approximately 4.7% of the shares of Enhabit, issued an open letter to the Company’s Board of Directors. “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 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… Shareholders must have full confidence in Enhabit’s Board of Directors 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… 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… 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. 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… In closing, we applaud the Board’s decision to initiate a strategic alternatives process, and we are confident that Enhabit’s strategic value significantly exceeds its current valuation… 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.”