Service Corp. International Monday said it would acquire competitor Alderwoods Group Inc. for $856 million to cut costs and expand its network of funeral homes.
The deal will combine the No. 1 and No. 2 players in the U.S. and Canada funeral market in a slow-growing industry that Service Corp. hopes will benefit from having costs spread out over a larger number of funeral homes, Tom Ryan, Service Corp. president and chief executive, said.
“We believe this is an industry that needs scale, driving efficiencies,” Ryan said in an interview.
Service Corp., the world’s largest cemetery and funeral home operator, will pay $20 per share in cash for Alderwoods, a premium of nearly 12 percent over the stock’s closing price of $17.90 on Friday.
About $374 million of Alderwoods debt will remain outstanding or be refinanced.
Service Corp. said the purchase would add to earnings per share within the first 12 to 24 months after it closed, excluding one-time costs.
Less than 5 percent of the combined 24,000 jobs at the two companies will be cut as a result of the merger, Ryan said. Most of the cuts will be in back office jobs, with operations being little affected. The companies also hope to save money by eliminating duplicate technologies.
Fragmentation
With Alderwoods, Service Corp. will have revenue of about $2.5 billion, based on 2005 financial results, and holdings of about 1,712 funeral homes and 490 cemeteries in 48 states, eight Canadian provinces and Puerto Rico.
Service Corp. currently has a network of more than 1,500 funeral homes and cemeteries in North America, according to its Web site.
The companies combined have about 15 percent of the funeral market in the U.S. and Canada, based on 2005 revenues, Ryan said.
But the industry is still fragmented, with about 80 percent conducted by independent operators, so antitrust issues should be minimal, William Burns, analyst at Johnson Rice & Co. LLC, said.
Burns, who rates Alderwoods “outperform” and Service Corp. “market perform” said at about 12.7 times Alderwoods free cash flow, the price was “reasonable.”
Unlike other service businesses, the funeral industry has specific marketing challenges, Burns, who owns some Service Corp. shares, said.
“It’s very difficult to market this product because customers don’t use the product on a continual basis,” Burns said.
But with the aging of the baby boomers, the funeral industry is set for more growth, Ryan said.
“Ultimately, we’re a baby boomer play,” Ryan said.
Improved operators
In recent years, Service Corp. has worked to strengthen its finances, cut costs and introduce more personalized services to boost customer loyalty. Alderwoods, meanwhile, has restructured by divesting some assets and cutting its debt.
“The merger evokes memories of unsuccessful consolidation initiatives in the 1990s, but both SCI and Alderwoods are leaner, more efficient operators post several years of restructuring under new management,” Robert Willoughby, analyst at Banc of America Securities, said in a a research note. He rates Service Corp. ”buy.”
Last month, Service Corp. said it expected funeral and cemetery revenues to rise in 2006, with price increases and new products offsetting flat-to-lower funeral volume.
Instead of focusing on caskets, flowers and grave spaces, Service Corp. has diversified by offering premium services such as estate planning, Internet memorialization, cremation gardens and helping with post-death legal paperwork.
Service Corp.’s subsidiary, Kenyon International Emergency Services, was hired by the state of Louisiana last year to help recover the bodies of those killed by Hurricane Katrina.