Business, Finance

Forbes writer advocates for Batesville spin-off from Hillenbrand

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Earlier this summer we brought you this article which brought information that parent company Hillenbrand Industries was contemplating “strategic alternatives” for its Batesville division.  Last week Forbes contributing writer Jim Osman expressed in this article his opinion that the Batesville division should be “spun-off” from Hillenbrand in order to unlock “shareholder value”.

Osman contends that up until about the year 2010 Batesville “was” Hillenbrand Industries.  It was about then that Hillenbrand began using the predictable cash-flow and profits from Batesville to build up what is now known as its industrial solutions businesses.  As a matter of fact, Batesville went from being virtually 100% of Hillenbrand revenue to the point where it is today. . . about 20% of company- wide revenue.

Osman also contends that over the past dozen or so years that Batesville’s cash-flow has been used to pay down debt related to Hillenbrand’s acquisition strategy and now is the perfect time to make the spin-off.  He makes the point that by doing so (paying off debt), the industrial businesses of Hillenbrand have become cash-flow generators on their own part.

The article also makes some points that many of us personal investors don’t think about.  For instance, the writer makes a point that with the financials of Batesville, on its own, and the rest of the Hillenbrand companies on their own, it would be possible for both, in his opinion, to retain membership in the S & P Small Cap 600 Index.  Osman believes that’s a valuable component of the spin-off. . .otherwise “indexed selling” may cause a loss of shareholder value.

Osman also makes the point that Hillenbrand and its Batesville subsidiary may be poised to do something like this since new Hillenbrand CEO Kimberly Ryan was on the Board of Directors of Kimball International when it spun-out its Kimball Electronics division in 2014 helping to create a 128% value for shareholders.

Finally, Osman states that Batesville derives 89% of its revenue from casket sales and that is producing margins around 20%.   He also mentions that other death care public companies such as Service Corporation International and Carriage Services produce margins of around 30-33% with their consumer services model.  The article then makes this statement, “We believe a separation into an independent company will allow BATES (Batesville) to leverage on its operational performance and potentially venture into the higher margin Funeral business and Services as well as the cremation space, thereby improving its operating margins and increasing investor wealth.”

Tom Anderson
Funeral Director Daily

Funeral Director Daily take:  Wow!  The Forbes article gives me lots to think about in this situation.  When I first read in July that Hillenbrand was exploring alternatives for its Batesville unit I thought of results of officers of the company taking it private.  I thought of private equity people taking the company private.  I even thought that maybe descendants of the Hillenbrand family may want to re-take ownership of the company their ancestors started.

However, creating two public companies with existing shareholders owning the stock may make sense in the long-term interest of today’s shareholders and it was something I hadn’t thought about.

Osman’s idea that the company could be spun-out into another public company that leverages its cash-flow to move into other sectors of the death care business allows me to dream up these scenarios:

  • Batesville gets back into financial services such as preneed insurance and death care loans to funeral homes and acquisition companies by using its predictable cash-flow to build these businesses.
  • Batesville finally moves into the funeral home ownership realm putting more competition into large operator acquisitions.  I find this doubtful however as it would bite the hand that feeds it — wholesale casket purchasers.
  • Batesville uses it cash-flow to build a large direct cremation business nationwide and morphs from the largest casket seller to the nation’s largest provider of direct cremation. . . interesting thought.

In any regard, you can see that there are all types of ideas that could happen.  It will be interesting to see what does.

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