SCI Has Been Trying To Purchase Stewart Enterprises For 5 Years
This article was originally published in the May 30th, 2013 edition of the Memorial Business Journal
Houston – The question was never if Service Corporation International was going to acquire Stewart Enterprises, but when. Five years after a failed attempt by SCI to acquire the number-two funeral service provider, the number-one provider has agreed to acquire Stewart Enterprises in a $1.4 billion transaction.
Under the terms of the deal, SCI will acquire Stewart Enterprises in an all-cash merger with a total enterprise value of approximately $1.4 billion. Holders of Stewart’s Class A and Class B common stock will receive $13.25 in cash for each share of common stock they hold. The per-share consideration represents an approximate premium of 48 percent above the volume weighted average closing price of $8.97 per share for the 30 calendar days ending May 23, 2013.
In 2008, Stewart rejected a proposal from SCI to acquire all of the outstanding shares of the company for $9.50 in cash. “This is a positioning by SCI to ride the wave of the boomer death rate,” said David Nixon, president of Nixon Consulting and Heartland Funeral Solutions, Chatham, Illinois. “They are really positioned well. They have seen the numbers and they know as well as anyone what to expect in terms of the increase in the number of deaths over the next 15 years.
“They are doing the right thing, consolidating what they can,” he added. “It makes logical sense.”
And they’ve danced this dance before, said Nixon. Dan Isard, president of The Foresight Companies, Phoenix, offered a season-appropriate analogy. “This has been like two kids debating whether they are going to prom together. The reality is that they are the only ones with whom the merger could have happened.”
Isard said it was predictable that the transaction had to happen. “Unfortunately, when you deal with the economics and taxation of this world, there is such a thing as federal estate tax,” he said, noting that about one-third of Stewart Enterprise’s total value is owned by Frank B. Stewart Jr., chairman of the board of Stewart Enterprises.
Looking back over the previous five years since the last overtures were rejected by Stewart, the economic environment has changed. “Clearly the market values have gotten stronger, and the market is extremely strong right now,” Isard said. “The stock market is strong, the merger market is strong, most of the public companies had good cash reserves; we’re still looking at the fact that this merger had to happen at some point in time.”
Tom Johnson, founder of Johnson Consulting Group, Scottsdale, Arizona, compared the Stewart acquisition to SCI’s purchase of Alderwoods in November 2006 for $1.2 billion.
“I don’t think anything more or less will happen [differently] than when they bought Alderwoods,” he said. “Everybody was kind of shocked back then about how fast it was, but then, after a year of bringing it into their operation, divesting the properties they had to and selling off some of the nonproducing ones, it rolled along and they did a good job with it.
“I think the same thing is going to happen here,” Johnson continued. “I think the difference is, by and large, that Stewart is a much stronger company than what Alderwoods was at the time because Alderwoods was going through some problems [just emerging from bankruptcy]. Stewart has many cemetery/mortuary combinations, which is a good thing for SCI.”
What did strike Johnson about the scope of this deal was the size of the combined SCI/Stewart organization compared with the other national companies. “They will be about $3 billion in revenue, and the next closest operator is somewhere around $200 million plus,” Johnson said. “They have really separated themselves from the field.”
According to a news release, Stewart’s board of directors, acting on the unanimous recommendation of a special committee of independent directors, unanimously approved the transaction and recommended that its shareholders approve it. In connection with Stewart’s entry into the merger agreement, Frank B. Stewart Jr., chairman, entered into a voting agreement with SCI pursuant to which he has agreed to vote Class A and Class B shares of common stock representing 29.99 percent of the aggregate voting power of Stewart voting stock in favor of the transaction.
“We are very pleased to announce this agreement to merge Stewart Enterprises into our company,” said Tom Ryan, SCI president and chief executive officer. “Throughout its 100-year history and for the last five decades of Frank Stewart’s tremendous leadership, Stewart Enterprises has compiled an impressive portfolio of high-quality funeral homes and cemeteries across North America.
“This network of funeral homes and cemeteries, led by Stewart’s outstanding 4,800 associates, enjoys a tremendous leadership position in their communities and a reputation of providing families with superior and compassionate service,” Ryan continued. “We are extremely excited by the prospect of working alongside the Stewart associates and continuing to build on their success.”
During a conference call with investors, Ryan said that this “is a tremendous deal for SCI and it will benefit our shareholders, our customers and our combined team of employees.
“The acquisition further strengthens and complements our existing footprint,” he added.
Ryan said that Stewart’s businesses are generally institutional in nature and are concentrated in metropolitan areas that align well with SCI’s portfolio. “Metropolitan areas are where we see the most opportunities for near-term growth primarily through preneed sales strategies,” Ryan said. “In particular, Stewart has a high mix of cemeteries to funeral homes in its portfolio, about 40 percent, compared to our 21 percent, which further supports opportunities for enhanced growth in preneed sales initiatives. The average numbers of funeral services performed at each [Stewart] funeral home and the average burials per cemetery at Stewart are double the industry average.”
He noted that SCI’s average preneed sales consumer is about 63 years of age. “So from a timing perspective, the baby boomers are impacting our company right now.”
In a press release, Thomas M. Kitchen, president and chief executive officer of Stewart, stated, “Our board of directors and management team believe that the merger with SCI offers superior value for our shareholders.”
“Our combined resources will make us accessible to more families throughout the United States and Puerto Rico,” he added. “The value offered to our shareholders is a reflection of the dedication and commitment of our 4,800 exceptional employees throughout the company who share a passion of service. We have also enjoyed the vision and energy of our chairman, Frank Stewart, who has devoted his 54-year career to this profession.”
The acquisition will expand SCI’s network in the highly fragmented funeral and cemetery industry in North America. The combined company is expected to have pro forma revenue of nearly $3 billion and a pro forma backlog of future preneed revenue exceeding $9 billion. The two companies have 2,168 locations in 48 states, eight Canadian provinces and Puerto Rico. These locations include 1,653 funeral homes and 515 cemeteries, of which 282 are combination locations. (By comparison, the next largest national companies are StoneMor Partners, with 92 funeral homes and 276 cemeteries in 28 states and Puerto Rico, and Carriage Services, with 167 funeral home locations and 33 cemeteries in 26 states.)
The acquisition is subject to customary closing conditions, which include approval from Stewart’s shareholders and the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Act. Concurrently with the signing of the definitive agreement today, SCI entered into a voting agreement with Frank B. Stewart Jr., pursuant to which Mr. Stewart agreed to vote in favor of the acquisition. SCI anticipates the closing of the acquisition late in this calendar year or early in 2014.
Ryan said SCI is expect to realize approximately $60 million in annual cost savings from the combined company within 24 months after the expected closing date in late 2013 or early 2014.
This $60 million in synergies represents 11.4 percent of Stewart’s revenues. Ryan broke down the synergies into three areas:
• Improved purchasing power through greater scale
• Reduced back-office systems and infrastructure costs
• Elimination of duplicative public company and management structure costs
The last two points translate into position eliminations, however Ryan did not say how many. Stewart has approximately 400 employees at its New Orleans office.
“While we clearly understand the need to combine the two companies efficiently, we intend to maintain an infrastructure presence within Stewart’s base in New Orleans,” Ryan said.
Johnson doesn’t think there will be the need for as much divesting as was required when SCI bought Alderwoods, given Stewart’s ratio of funeral homes and cemeteries. “Also, as the longtime number-three operator, Stewart could watch SCI and The Loewen Group [Alderwoods] go head to head, market to market, while they, by comparison, took a more lowkey approach to acquisitions,” Johnson said.
“A lot of the Alderwoods locations around the country were in small to medium-size markets, and a lot of them were in SCI’s backyard, so there were a lot of divestitures with that one,” he added.
Johnson predicted that the number of properties that will have to be divested because of Hart-Scott-Rodino [AntiTrust Act] will be fewer than the number when SCI acquired Alderwoods. “When it comes to Stewart, I think that number pales in comparison,” he said. “Will there be divestitures? Yes. Will there be a lot of them? I don’t think so.”
In 2009, SCI acquired Keystone North America for $256 million. The mandatory divestiture of properties from that transaction led to the birth of Foundation Partners Group.
Brad Rex, president and CEO of Foundation Partners, offered his company’s congratulations to the SCI and Stewart teams on the merger.
“As stated by the companies, their combination will result in divestitures in certain markets, and we look forward to potential acquisitions of high quality locations that fit with our company strategy,” Rex said. “We believe that growth that benefits funeral care customers, employees and the profession is a good thing and are excited about the future opportunities in our industry.”
Days Gone By
Nixon recalled the days of the go-go ’90s when SCI and Loewen were fueling the funeral home feeding frenzy. “SCI and Loewen were going head to head so much,” he said. “Sometimes [the price] got up to $20,000 a call for a funeral home. It got to that point because they were going head to head, trying to beat each other out. It cost them both.
“Stewart was a bit under the radar, but everybody knew about them,” Nixon added. “They didn’t get caught up in the 1990s frenzy to the degree of SCI and Loewen.”
Nixon believes that the sheer size of the transaction may invite more scrutiny by the FTC. “It is narrowing the field,” he said.
There are going to be some divestitures and there are going to be markets where the FTC is going to require divestiture, Isard opined. “Those are momentary blips and they are opportunities that a handful of people will try to take advantage of and that is the good news in a capitalistic world,” he said.
Nixon wondered if funeral service would witness another feeding frenzy as boomer owners begin to move out of their businesses.
SCI expects to generate approximately $60 million in annual cost savings from the combined companies. These synergies are anticipated to be fully realized over a 24-month period after the closing date. The synergies are generally expected to comprise reduced back-office systems and infrastructure costs, elimination of duplicate public company and management structure costs, and improved purchasing power. Material workforce reductions at the field-operating level are not expected. While SCI clearly understands the need to combine the two companies efficiently, it intends to maintain an infrastructure presence within Stewart’s base of New Orleans. SCI estimates it will incur cash costs of approximately $30 million to generate these synergies over the two-year period.
“This was not an easy decision for me,” said Frank Stewart. “Over the generations, my family has worked tirelessly to build this firm. I care deeply about our people and the presence we have in the New Orleans area. I understand from SCI management that SCI intends to maintain an infrastructure presence in the city.
“The reason they want to acquire Stewart is because they know we have great talent and very committed people,” he added. “They also want to enlarge their organization and geographic footprint through the acquisition of Stewart’s premier businesses, which enjoy an outstanding reputation of service. I am confident that our employees will have an even greater opportunity to build their careers working with SCI.”
SCI believes the acquisition is well aligned with its long-term strategy of delivering sustainable growth and enhancing shareholder value. Excluding anticipated one-time implementation, financing and closing costs, the acquisition is expected to be immediately accretive to normalized earnings per share and adjusted cash flows from operations. SCI also expects the acquisition to generate a compelling return that is consistent with its capital deployment strategy.
So how does this deal affect the rank-and-file independent funeral homes? It doesn’t, Isard said. “The number of corporate funeral homes will stay relatively the same and in fact might decrease by a few here and there,” he said. “In major markets where Stewart and SCI are primarily, you are not going to see any change.
In the smaller markets Stewart was in and operated independently, because of their dominance as a combination operator, Isard doesn’t see the Stewart properties losing market share. “Stewart doesn’t lose market share very often and its share is extremely strong in whatever markets it is in,” he said.
Before looking ahead, Johnson looked back. “SCI has been wanting to do this for quite a few years now,” he said. “Over time, this deal finally came together. And now we’ll see how this will play out. I think everything will be fine. Independents still dominate this industry by far, and yet SCI has become extremely powerful.”