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Potential Activist Break-Up of Leading Pure-Plays

Chemed Corp. (CHE) offers a rare opportunity to Spinoff into two pure-play services companies with very little leverage, creating immediate value for shareholders in the event of a split. This potential activist break-up would separate the currently unrelated hospice care (VITAS Healthcare) and plumbing services (Roto-Rooter) segments, both of which are dominant players in their respective spaces. Read the attached analysis for more of our thoughts on why this break-up makes sense.

What's the Opportunity?
Chemed Corp. (CHE) operates in two unrelated businesses, (i) VITAS Healthcare, the hospice business and (ii) Roto-Rooter Co., the plumbing and drain cleaning services business. The conversation of splitting the two businesses has been a topic of discussion with the management for more than 10 years, which first started in 2009. Back then, MMI Investments (no longer around) sent a letter to separate the two businesses, which management did not pursue. With CHE’s stock price trading around the $45 mark in February 2009, a break-up then would have been way too early due to the small size of both entities and its leverage.

Fast forward to today, VITAS Healthcare (~66% of FY19’s revs) is the nation’s largest provider of end-of-life care and Roto-Rooter (~33% of FY19’s revs) is the largest commercial and residential plumbing and drain cleaning services provider in North America. With management keeping the thought of a tax-free Spinoff of its Roto-Rooter in the mix, we see this as a prime opportunity for an activist investor to work with management regarding the current benefits of a Spinoff and the transaction providing immediate upside for shareholders in this environment.

Recent Pure-Play Hospice Spinoff Shows the Way / High Investor Interest: On October 1, 2019, The Ensign Group (ENSG) Spun off its uniquely positioned senior living and home hospice business into a separate publicly traded company called The Pennant Group (PNTG). With ENSG following the same playbook as its previous REIT Spinoff back in 2014, PNTG listed as a small cap high-margin, low leverage, asset-light business, which is primed for a mid-term takeover in this competitive space (for analysis of this Spinoff, click here).

Opening at the wrong price of $6.15 (doubling on day 1 and closing at $15.09), PNTG is up +374.3% at a current price of $24.14, with the stock jumping as high as $35.99. Even if we assume the closing price of $15.09 due to volumes on the day, PNTG has still outperformed, given a return of 60.0% to date compared to the 10.8% return of the S&P 500 Index and -0.6% return of the S&P MidCap 400 Index for the same period.