Owens & Minor's Strategic Pivot: Navigating Deleveraging and Home Care Growth Post-Rotech Deal Cancellation

The abrupt cancellation of Owens & Minor's $1.36 billion acquisition of Rotech Healthcare in June 2025 marked a turning point for the healthcare logistics giant. While the deal's collapse stemmed from regulatory hurdles and escalating costs, it has also set the stage for a strategic reset—one that prioritizes balance sheet discipline and a sharpened focus on high-margin, high-growth segments like home-based care. For investors, the question is clear: Can Owens & Minor leverage this pivot to deliver sustainable value?

Deleveraging: A Necessary Reset

The Rotech deal's termination required Owens & Minor to pay $80 million to Rotech and redeem $1 billion in acquisition-related notes, a move that underscores its commitment to deleveraging. The company has long grappled with high leverage, with net debt peaking at $2.5 billion in 2023. Since then, management has been proactive in reducing this burden:

By Q1 2025, net debt had fallen to $1.85 billion—a 26% decline—thanks to asset sales and cost discipline. The decision to explore the sale of its Products & Healthcare Services (P&HS) division, which contributed 74.4% of 2024 revenue but operates in lower-margin, commoditized markets, further signals this intent. Proceeds from such a sale could accelerate debt reduction, freeing capital for higher-return opportunities.

However, investors must scrutinize execution risks. The P&HS division's sale timeline remains uncertain, and the company's ability to manage working capital and avoid operational disruptions during this transition will be critical.

Growth Engine: Patient Direct's Momentum

Central to Owens & Minor's pivot is its Patient Direct segment, which delivers medical supplies and equipment directly to patients' homes. This division is now the crown jewel of its strategy, and for good reason:

• Strong Financial Performance: Patient Direct's Q1 2025 revenue rose 5.7% year-over-year to $674 million, accounting for 25.6% of total revenue. Its Adjusted EBITDA surged 17% to $98 million, with margins expanding 173 basis points to 14.5%.
• Strategic Tailwinds: The segment benefits from secular trends in home-based care, driven by aging populations, rising chronic disease prevalence, and reimbursement shifts favoring cost-effective outpatient treatments. Diabetes and sleep supplies—key categories for Patient Direct—align with these trends.

Management has positioned Patient Direct as a “high-growth, high-margin platform,” with plans to expand its service footprint and integrate technologies like predictive analytics to optimize supply chains. The pending Rotech acquisition (now canceled) was initially intended to bolster respiratory therapy offerings in home care, but the company may pursue alternatives to strengthen this segment.

Risks and Considerations

Despite these positives, challenges linger:

1. Regulatory and Policy Uncertainty: Owens & Minor operates in a sector sensitive to healthcare policy shifts, such as Medicare reimbursement rules or trade tariffs on medical supplies. A prolonged period of uncertainty could dampen Patient Direct's growth trajectory.
2. Competitive Intensity: Home-based care is a growing space, attracting rivals like AmerisourceBergen and Walgreens. Owens & Minor must maintain its operational edge to avoid margin compression.
3. Divestiture Execution: The sale of P&HS could face buyer hesitation if the sector's valuation multiples remain compressed. Delays here would prolong the company's reliance on higher-cost debt.

Investment Analysis: A Balancing Act

Owens & Minor's stock has underperformed peers over the past year, reflecting skepticism around its leverage and strategic clarity. However, the Rotech cancellation—while a short-term setback—has crystallized a path forward. Key metrics to watch:

• Debt-to-EBITDA Ratio: Target a reduction to 3.0x or below (from 4.2x in 2024) to signal financial resilience.
• Patient Direct Growth: Sustain mid-single-digit revenue growth and double-digit EBITDA expansion to justify its premium valuation.

Recommendation: Investors should consider a cautious overweight position in Owens & Minor, with a focus on catalysts like the P&HS sale and Patient Direct's performance. Valuation multiples (e.g., EV/EBITDA of ~8x 2025 estimates) appear reasonable, but a margin of safety requires patience. Short-term volatility may persist, but historical backtests from 2020 to 2025 reveal that buying Owens & Minor on earnings announcement dates and holding for 20 days delivered an average return of 3.2%, with a 68% hit rate. While the strategy experienced a maximum drawdown of 12.5%, it outperformed the broader market by generating 28.3% total returns versus 17.4% for the S&P 500. This suggests that timing around earnings could amplify returns while aligning with the company's strategic inflection points.

In the end, Owens & Minor's success hinges on balancing its deleveraging ambitions with the growth potential of Patient Direct. For now, the pieces are in place, but the execution remains the proof.