HealthSouth Corporation (NYSE:HLS) announced on November 24 that it has entered into an agreement to acquire for $750M privately-held EHHI Holdings, which owns Encompass Home Health & Hospice. Encompass is the fifth-largest Medicare-focused, skilled home health services provider in the U.S., operating 140 locations across 13 states, with approximately 5,000 employees making more than 2.1 million patient visits per year. The deal was approved by both companies' boards of directors and is expected to close in mid-December. The 8-K filing details the terms of the deal and can be downloaded here.
As detailed in my recent HLS article, "significant new portfolio expansion" is a core tenet of my investment thesis and "not only better positions the company for the longer-term demand from the secular trends described above, but also brings intermediate-term growth that is accretive in relatively short periods of time."
The acquisition of Encompass is obviously consistent with that aspect of my investment thesis, and I believe the deal will contribute significantly to the growth at HLS. As with any acquisition, expanding to complementary services involves risk, but the HLS leadership has a proven track record of successfully integrating acquisitions and the Encompass leadership also has experience in the area, having successfully integrated 45 acquisitions of their own in the last ten years. Furthermore, the two companies already have a relationship in that 4% of the patients HLS discharges to various home health providers each year already go to Encompass. HLS management has said that they will provide a specific expectation for EPS accretion when they release 2015 guidance. While my HLS price target stands until I can incorporate accretion from Encompass, I suspect that my twelve-month target may be reached sooner than I initially anticipated, so I expect a need to update my price target sooner than usual.
Jay Grinney, HealthSouth President and Chief Executive Officer, commented on the rationale of the Encompass acquisition during a conference call [pdf]:
For some time, we have stated that a component of our long-term growth strategy has been to expand into other, complementary post-acute services and have identified home health as the sector that was most appealing. The rationale for expanding into home health is predicated on two core beliefs. The first is our belief that the highly fragmented home health industry is ripe for consolidation, which presents a compelling new growth platform for HealthSouth. The second is that HealthSouth's competitive position in a future characterized by value-based purchasing and integrated delivery models will be significantly enhanced if we can provide a continuum of both high-quality facility-based and home-based post-acute services.
Disclosure: The author is long HLS.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am long HLS, will not buy or sell any shares in the next 48 hours, and do not plan to close my position for at least several years.