Industry News • April 1, 2019
Encompass Health Corporation (NYSE: EHC) announced Monday that it has reached a definitive agreement to acquire “substantially all of the assets” of Birmingham, Alabama-based Alacare Home Health & Hospice. Under terms of the deal, Encompass Health will pay $217.5 million for the privately-owned company, SEC filings show.
The more than $200 million price tag for Alacare is roughly double the top-end amount Encompass Health previously told investors it aimed to spend on its acquisition pipeline in 2019.
Encompass Health will use cash on hand and its revolving credit facility to fund the purchase.
“We’ve been talking to Alacare for years,” April Anthony, CEO of Encompass Health’s home health and hospice business, told Home Health Care News. “We’ve over the years had many occasions to talk about the potential opportunity … because our cultures just align so well.”
The ongoing discussion picked up in earnest late in Q4 2018, Anthony said, when Alacare officials got serious about selling the business. The deal is expected to close in Q2 2019.
As previously noted, the investment is significantly larger than what the company outlined for 2019 home health and hospice spending in its most recent earnings call. Encompass Health President and CEO Mark Tarr told investors the company would spend $50 to $100 million to grow and acquire new home health and hospice locations this year.
“When you have these big [acquisitions], it’s great, but you hate to promise that you’re going to catch a big fish when you’re just not sure what the opportunities are going to look like,” Anthony said. “So we’re always pretty conservative in that acquisition profile.”
Encompass Health is the largest owner and operator of in-patient rehabilitation facilities (IRFs) and the fourth-largest provider of Medicare-certified home health services in the United States. While the overall company is based in Birmingham, its home health and hospice segment is headquartered in Dallas.
Meanwhile, Alacare operates 23 home health locations and 23 hospice locations across Alabama, generating about $117 million in revenue in 2018.
The acquisition expands Encompass Health’s services into new markets and complements three markets in which it has existing IRFs in Alabama. It will also make Encompass Health one of the country’s top-10 largest hospice providers based on Medicare reimbursements, according to the company.
“We certainly had a presence in the state of Alabama, but we were not dominant in the state of Alabama,” Anthony said. “Now with the Alacare acquisition, this really gives us the opportunity to build a dominant presence there and to leverage those economies of scale and those reputational benefits that come with being a large player in the market.”
While industry analysts weren’t expecting the deal, they were hardly shocked by it.
“The deal announced today is consistent with the M&A strategy that EHC has communicated to investors for the last few years which is to increase market density, increase overlap with the company’s IRFs and build scale in hospice,” Dana Hambly, an analyst with independent financial services firm Stephens, told HHCN. “The Alacare deal looks to check all those boxes.”
On top of that, the acquisition shows Encompass Health is confident in its ability to adapt under the Patient Driven Groupings Model (PDGM), RBC Capital Markets analyst Frank Morgan told HHCN.
“It kind of shows a commitment to that strategy that they’re building for the long-term … so they really want to have both IRF and home health care capabilities,” Morgan said. “I think it also says, ‘Hey, look!’ I know everybody is worried and paying a lot of attention to PDGM coming next year, but my interpretation is they feel pretty comfortable or they wouldn’t be making a $200 million acquisition.”
Set to take effect Jan. 1, PDGM will revolutionize the way home health agencies operate and how they are reimbursed. Encompass Health has repeatedly reassured investors it is prepared for the changes and is continuing to push back on the model’s widely opposed behavioral adjustments.
This article originally appeared in an article in Home Health Care News.