It’s interesting that on the same weekend that I was putting together yesterday’s article on the July 29 Park Lawn Corporation vote on acceptance of an offer to take the company private I uncovered a current article and podcast dating from July 12.  The article, from Intelligent Investor of Australia, deals primarily with Australia’s Propel Funeral Partners but also deals with the Death Care industry’s “Roll-up” model of acquisitions to build larger companies.  That’s a model which has been used hundreds of times and is still happening on a world-wide scale at this time.

 

The information in the podcast/article comes from Australian analysts Nick Cummings and Angus Donohoo along with Canadian stock analyst Graham Whitcomb.  As you read some of the excerpts that I have in today’s Funeral Director Daily article, they have a very different opinion of funeral home roll-up acquisitions than many in our profession.

 

The “Roll-up” model was first initiated in the funeral home space by Service Corporation International (SCI) founder Robert Waltrip in the 1960’s.  Nobody can argue that Waltrip’s idea has proved succesful for his company and you cannot also disagree that he’s had scores of potential imitators and while some have had success, many of those imitators have fell by the wayside.

 

The Intelligent Investor article and podcast is generally “bearish” on the roll-up model with what seems to me to be an overall assumption on the commentators’ part that eventually debt and the cost of capital will take its toll on roll-up operators.  And, to be honest, that has happened with some United States death care companies over the past 50 years — including some industry consolidators that, it is probably fair to say, may be struggling with those issues right now. . . and even SCI has fought those battles from time to time over the years.

 

You can read and/or listen to the Intelligent Investor position here.  In the meantime, here’s some of their opinions that may prove controversial to some. . .

 

Contrasting Performance plagues the industry –  “Investors talk about or around stocks when a stock’s got very different and divided opinions about it and I think this applies here to this industry. We covered Invocare for about a decade, I think, at I-I and over that time it 10-bagged, and then it really severely underperformed as competition came into the sector. It’s the same in the US with a company called Service Corporation, that is their largest funeral operator over there, it’s had periods of good performance and periods of underperformance and it’s also the same in the UK with a company called Dignity, they eventually collapsed but before that their share price performed quite well. So, it doesn’t matter what you look at, contrasting performance seems to sort of plague this industry and I guess it’s a bit, in my view, understandable.”

 

Death Care roll-up is a “lucrative” model with tons of debt — “So, this is a lucrative model on one hand, you have steady volumes, in some cases they’re rising with the ageing population and extremely strong pricing power. But then on the other hand, you have a ton of competition and balance sheets that just seem to be stacked with debt.”

 

The guest analyst’s thoughts on “going through a funeral — “We went through that whole process of a funeral and I think probably most people at some point in their life have had some direct or indirect experience with funerals and they are astonishingly expensive. I also just sort of observed that I’ve been to a few over the years and it just seemed like the quality was less, the price was astronomical and there was this incredibly kind of galling thing in our experience where we paid, I forget, over $10,000 dollars for this funeral and at the end, the undertaker, this nice lady, she made this great big show about coming over and giving us a candle and saying, here’s this gift bag, inside there is a candle that is our gift to you – and I just was like, “What is this…?”

 

About funerals and their “Pricing Power” — “I don’t know if you guys agree, but essentially, it’s hard to think of a less informed or a more badly informed customer than someone purchasing a funeral package. Even if you think about a wedding which is an infrequent purchase, you know, you talk to your friends and family, you have years to prepare for it, you walk through the venue, none of this happens in funerals.”

 

The “Roll-up” dealmakers — “It’s interesting, actually, the executive of the business, none of them really started in the funeral industry, they all were sort of M&A people and actuaries and they were quite involved in – Invocare bought, for about $190 million, bought one of the largest New Zealand funeral care groups and it looks like basically what’s happened is they’ve seen the makings of the industry, they’ve sort of been involved in that big deal and then they all thought, well this is a real opportunity here and sort of basically tried to replicate that on a bigger scale. But I always – it’s interesting when you look at a business, that none of the executives, none of them cut their teeth as undertakers.”

 

The fate of the “Roll-up” model, because of the wise small operators –“. . . it’s worldwide, there’s very few exceptions to the rule. The reason why, is essentially a rollup is just taking advantage of a private/public multiple arbitrage, where you’re buying a business at, say, four times EBITDA and you trade it at six times or eight times EBITDA and you just keep doing this. But it also treats these smaller business owners for fools, that they don’t know what their business is worth, but they probably find out these executives that think they know everything about the industry, that there’s small and family business operators that do know what their business is worth and eventually they (roll-up operators) raise too much debt – these larger ASX (Australian Stocke Exchange) listed businesses – they buy an acquisition that doesn’t quite fit and is too large and it all just comes crumbling down.”

 

Private Equity and the thoughts of “Ending Badly” —  “Your only really competitive advantage here – and I think you’re starting to see this a little bit . . . with Propel or just funerals in general, is capital. So, because these ASX listed companies can go and raise money, go and raise debt, they’ve got the capital so they can rollup the industry, but now you’ve got private equity coming into the space and they’ve got a ton of capital and they’re starting to push multiples up that people are paying for these funeral homes and I just don’t know if you want to be in a space where your only competitive advantage is capital, it’s just going to end badly, I think.”

 

Funeral Director Daily take:  You can see while I warned you that many of these thoughts may be controversial.  Very seldom do we receive as blunt an assessment of our roll-up companies as these analysts paint.

 

I’m of the opinion that differing thoughts are good for all of us to hear. . . . and the more facts and opinions that we take in give us the ability to make informed decisions and thought processes on our own.

 

It’s part of Funeral Director Daily’s modus operandi to bring our readers these differing opinions and hope that you make the proper decisions after analyzing all of the facts and decisions available to you.

 

More news from the world of Death Care:

• Singapore’s funeral employers facing recruitment, retention challenges.  Human Resources Director – Asia
• Arlington Cemetery Renewal and Remembrance event honors fallen veterans.  Video news story and print article.  Fox Channel 5 – Washington DC (DC)
• Honor guard looking for more volunteers.  The Winchester Star (VA)

 

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