CIBC EQUITY RESEARCH
June 29, 2023 Flash Research
PARK LAWN CORP.
Hit One Out Of The Park? CSV Deal Could Be Highly Accretive
Our Take: The ultimate attractiveness of the proposed acquisition of
Carriage Services (CSV) by Park Lawn will depend on the terms and
structure of the private equity investment as well as the assumed level of
synergies. We have no insight on the former, but on the latter, we believe
cost savings could be material: EPS accretion could exceed 25%, possibly
meaningfully higher. Leverage concerns are valid, especially given PLC’s
moderate FCF conversion, but the combined cost savings could make for an
attractive outcome if the deal goes through. In the table in Exhibit 1 on page
2 we provide a summary of a prospective transaction.
What Happened: Early on Thursday, CSV announced it was exploring
strategic alternatives. Roughly ninety minutes later, PLC confirmed it had
submitted an all-cash proposal to acquire CSV, while partnering with a large
private equity firm. Moreover, a copy of the offer letter is widely available on
an industry publication. The letter names the private equity partner (“affiliates
of Brookfield Asset Management”) and a $34/share offer price.
Wide Range Of Synergies Estimates: On one hand, an argument can be
made that synergies are meaningful, but not massive. PLC’s deal for
Signature in 2018 featured targeted synergies of ~30% of acquired EBITDA.
We believe the figure for most of PLC’s recent deals is < 20%.
However, in some cases, savings have been much higher. We point to two
transactions—of businesses of similar size as CSV—that yielded higher
synergies: Service Corp’s (SCI) deal for Alderwoods in 2006 for ~ $1.2B
generated synergies of ~$50MM, while SCI’s 2013 acquisition of Stewart
Enterprises provided savings of ~$60MM (on a deal worth $1.4B).
Those figures are likely aggressive here. CSV’s combined G&A and
unallocated costs were $60MM last year. Limited geographic overlap may be
an advantage with the Federal Trade Commission (FTC), but not when it
comes to synergies. There are likely also some savings from increased
buying power with suppliers. In all, we estimate just under $25MM in
synergies, but this may be conservative. One counter-synergy: if CSV is
acquired, its debt effectively becomes entirely floating rate, adding ~$10MM
in annual interest costs.
EPS Accretion Details: Assuming synergies of ~$24MM, or 20% of acquired
EBITDA, we estimate EPS accretion of 28% and leverage of 3.7x. For
simplicity, this assumes the private equity investment mimics common equity,
when in reality, we expect it to be either convertible notes or preferred stock.
Likely Limited FTC Intervention: America’s FTC has not been supportive of
large M&A or anything that looks to reduce consumer choice or power. This
proposed deal would merge the #2 and #3 industry players, but combined
market share would still be just ~3%. We expect the FTC would take a state-
level approach, and meaningful overlap exists in NC, TX and KY (~25% of
combined sites). Some states preclude ownership of both funeral homes and
cemeteries, which could add to the total divestitures, but we believe in sum
these would be minimal.