Service Corporation International (SCI) is the largest operator in North America among funeral home and cemetery operators.  They will do somewhere near $4.2 billion in revenue this year while we believe their largest competitors, Carriage Services and Park Lawn Corporation will do somewhere about $400 million and $300 million respectfully.  In essence, by revenue metrics, SCI is probably 10 times larger than any North American competitor.

 

They have got that large by growing internally and also making acquisitions. . . sometimes very large acquisitions.  Park Lawn Corporation (PLC) recently announced that they have accepted an offer to be acquired by a company that will include Homesteaders Life and Birch Hill Equity Partners, a private equity firm, as investors.  That acceptance is dependent, at least as understood by this author, on a shareholder vote that is tentatively set for July 29.

 

The question remains, “Will anybody, including SCI, make a counter-proposal for the Park Lawn Corporation Board of Directors to consider before that July 29 date rolls around?”  I take a broad look at the possibility of SCI doing just that in today’s column as I jot down some of my initial thoughts on the situation.

 

History:  SCI has made large acquisitions before, none since 2013 though.  Here’s an almost two decade look at their large acquisitions.

• Alderwoods (2006) — At this time, SCI purchased their largest competitor, Alderwoods.  Alderwoods size at the time of the purchase was 594 funeral homes and 72 cemeteries.  Purchase price was reported as $856 milion. (Article)

 

• Keystone (2010) — In 2010, SCI purchased Keystone for a reported price of US$ 208 million.  It is believed that at the time Keystone was North America’s 5th largest death care operator with 199 funeral homes and 15 cemeteries.  Out of this transaction SCI was ordered by the Federal Trade Commission to sell some of the businesses for monopolistic reasons.  Foundation Partners Group was born out of this sale as they acquired 23 of the monopoly-sold businesses as part of their foundation. (Article)

 

• Stewart Enterprises (2013) — Again, in 2013, SCI purchased what was their largest competitor, Stewart Enterprises for a reported $1.4 billion.  Steward Enterprises had 217 funeral homes and 141 cemeteries and SCI was ordered, for monopolistic reasons, to divest 91 business units.  (Article)

 

Restraint of Trade:  In each of the latest three large acquisitions by Service Corporation International mentioned above they were required by the Federal Trade Commission to divest some of their funeral homes in order to meet requirements put on them as to gaining monopoly status in some markets across the United States.  From my perspective there would probably be some restrictions put on SCI in a takeover of Park Lawn Corporation also.  However, SCI understands the situation and from my point of view, I believe they could satisfy whatever the FTC requirements of monopoly power would be.

 

It’s somewhat difficult to pin down what percentage of the Death Care business SCI has in the United States.  Their 2023 Annual Report states that they performed 358,873 services in 2023.  However, other parts of their website state that they helped 600,000 families during the year.  There is probably some truth to both of those numbers when you look at the additional numbers above 358,873 they could be pre-arrangments and/or cemetery interments of lots sold.

 

Let’s say that SCI provided services for 358,873 people who died in 2023.  That would equate to about 11.4% of the estimated 3.15 million deaths in the USA during 2023.  Or we could look at the fact that they probably own about 1500 funeral homes in the United States of the estimated 18,000 in business today. . . . That would equate to a market share of about 8.3% of all the funeral homes in the USA.  In either case, at least compared with other professions, I don’t think that is monopolistic numbers.

 

Simply consider the fact that CVS has an estimated market share of 25% of all US retail pharmacy sales and even Walgreen’s has an estimated market share of about 15% of those same sales.  By those comparables, SCI should be allowed more room to grow.

 

Cost of the Acquisition:  It has been reported that the acquisition of Park Lawn Corporation is at CAN $ 26.50 per share or a total of CAN $ 1.2 billion (US$ 871 million).  The new company that pays that amount will still have the Corporate and Administrative Expenses of about US $ 32 million in annual operating costs because they have to have an administrative side to operations.

 

I would expect that if SCI turned out to be the purchaser much of that US $ 32 million might evaporate as they have general corporate and admistration expenses already in place.  So, adding a portion of that back into the Adjusted EBITDA might allow SCI to offer a higher per share price and still move the needle on multiple of Adjusted EBITDA lower than the new private company is willing to pay.

 

The Park Lawn Board of Directors has accepted the new proposal contingent on a shareholder vote on July 29.  SCI, or anybody else with a new proposal will have to come in higher than the current accepted proposal.  My thought is that an existing operator like SCI can probably do that and still find the numbers to make the acquisition accretive to the bottom line in a hurry.

 

Perception:  Funeral Director Daily ran this article about Service Corporation International’s stock performance back in February.  Our comparison showed that they are right up there with other “matured growth” companies such as McDonalds and Starbucks as far as stock value growth.

 

Those companies have a Price to Earnings Ratio (P/E Ratio) in the 20’s.  These “matured growth companies” are a long way away from the high-flying growth companies like Nvidia (P/E of 51) or Amazon (P/E of 52).  However, they are still in the “growth” category.

 

My question is this, “Can SCI sit out this opportunity of a large competitor in play and still make those investors who look at SCI as a “growth company” believe it is still that rather than a company simply interested in operations?   If investors see a company not focused on growth might they take a different view of the company’s goals and maybe drop the P/E ratio to something more akin to a “non-growth oriented” company?  I think that is a real unknown.

 

Those are just some of my quick thoughts as I ponder if SCI will be making a run for Park Lawn Corporation or not. . . . Stay tuned. . .

 

Disclaimer—  The author of this article is a shareholder in Service Corporation International

 

More news from the world of Death Care:

• Mendicki named KFDA President.  Parsons Sun (KS)
• Derry City Cemetery:  “Illegal dumping is abhorrent”.  BBC (Great Britain)
• Edinburg implements new regulations for funeral escorts.  RioGrandeValley.com  (TX)
• Natural burial grounds plan buried by Byron Council.  Byron Shire Echo (Australia)

 

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