Quick Pitch: Carriage Services (CSV)

Carriage Services (CSV) – Potential Buyout – 36%-67% Upside

Carriage Services has received an undisclosed buyout offer from its peer Park Lawn (PLC.TO) and promptly launched a strategic review to explore options including ‘a sale, merger or other potential strategic or financial transaction’. CSV has also retained Lazard as a financial advisor, which is known mostly for its expertise in M&A. Both companies operate in US/Canada deathcare industry. Park Lawn is an aggressive industry consolidator with 25 acquisitions completed since 2021. Its previous focus has revolved around smaller tuck-in deals. However, the merger with CSV would be transformative, effectively doubling Park Lawn’s enterprise value. Financing should not pose an issue as Park Lawn has already partnered with an unnamed large private equity firm and said it will not require any equity raise to complete the acquisition.

I think the launch of the strategic review instead of an outright rejection of the offer is a really positive sign here. If CVS’s management was really opposed to selling the company, it could have easily dismissed the offer, citing the undervaluation of the stock and the preference for focusing on the recently launched operational/structural initiatives. The company has just weathered a challenging period of underperformance and post-covid normalization of financial results. It has failed to meet its previous 3-year guidance and also saw delays in its deleveraging plan. All of this was marked by significant share price volatility and led to a reshuffling of the executive team. The company’s founder, who has been leading CSV for over 30 years, has finally decided to step down and transitioned into a chairman’s role. This happened just one week before the offer from Park Lawn was announced. In these circumstances, CVS could’ve easily put a ‘not for sale’ sign with no impact on the board’s reputation in the eyes of shareholders. Instead, they promptly initiated a strategic review focusing the PR language on potential sale and also hired Lazard to run the process. This suggests that CSV is seriously considering the offer. The founder/chairman himself is a very interesting man known for his unusual and transparent communication style with shareholders (have a read through these letteres – here and here). He is 80 years and has a 10% stake in CSV, which would net him over $50-$60m in a sale scenario.

The timing of this merger isn’t all that surprising. After a 20-year lull in consolidation, the M&A activity in the US deathcare industry is picking up speed once again. Consolidation is re-accelerating (see here and here) as the operators strive to capitalize on scale economies ahead of the expected surge in demand from the aging baby boomer generation. All major industry players (SCI, Park Lawn, and also CSV) have been actively pouring cash into M&A over the recent years.

CSV share price is up 20% since the strategic review announcement. The offer price hasn’t been disclosed yet. Attemting to estimate the price at which CVS could be acquired is a bit tricky due to the limited number of public peers and a lack of recent major transactions in the US deathcare industry. However, there are a few angles that suggest the company could be worth materially above its current price in a sale scenario. CSV trades at 9.5x 2023E adj. EBITDA, which is basically equal to TTM figures plus earnings contribution from recent acquisitions. The comps look as follows:

• US market leader SCI ($10bn mcap) trades at 13.5x TTM adj. EBITDA.
• Park Lawn itself trades at a bit lower 10.2x TTM. adj. EBITDA multiple pro-forma for recent acquisitions.
• Two global peers IVC.AX and DTY.L have been taken out this year at 15x and at 17x adj. EBITDA multiples respectively.

I am guessing Lawn Park could achieve material cost synergies with a combination of the two companies. The merger would be transformative and highly synergistic for the buyer, given the similarities between the businesses (funeral homes and cemetery services) and similar geographic focus mostly on the South and East regions of the US (see maps here and here). Park Lawn would likely be able to eliminate a large part of CSV’s overheads, which currently amount to $54m/year vs $113m adj. EBITDA. Assuming 50% of CVS’s corporate overheads could be eliminated in the merger, CVS trades at only 7.6x post-synergies EBITDA multiple. Maybe 50% is a bit too aggressive, but this show how the expected overhead savings could have a material impact on CVS’s valuation in a sale scenario.

7.6x EBITDA multiple seems too low and is basically in line with the level at which tiny local mom-and-pop acquisitions are getting done. In 2021 Park Lawn has made 10 acquisitions at an average post-integration adj. EBITDA multiple of 7.2x and a further 11 transactions in 2022 at a multiple of 7.7x. CSV has also completed 3 acquisitions recently spending $75m combined at 7.5x post-integration adj. EBITDA multiples.

CSV is a much larger player and the merger would be transformative for Park Lawn. This should warrant a sizeable premium over those tiny mom-and-pop tuck-ins. A 9x-10x post-synergies multiple would result in a $45-$55/share offer price for a potential 36%-67% upside from the current prices.

This offer price range should be somewhere close to a level at which CSV’s founder might agree to a sale. Half a year ago, in the Dec’22 letter he marked $49/share as an intrinsic value target that CSV should be able to exceed in a few years:

We believe the successful execution of HPCPRP (ed. note – short term performance plan) through 2023 and 2024 will create Intrinsic Value Per Share that exceeds the $49.06 per share average price of the 3.6 million shares repurchased since May 13, 2021. Moreover, notwithstanding the external macroeconomic environment, we believe that the valuation multiples applied to our increasing consolidated and per share performance metrics during this period by equity investors (Mr. Market Price Per Share) will expand in direct correlation to the success of our balance sheet deleveraging program under HPCPRP.

A bit more background on CSV can be found in this VIC write-up from 2018.