Christopher Niesche: Funeral firm’s classic dance around takeover bid

Questions have bee raised over whether the funeral company has made the best moves following takeover offer. Photo / 123RF

OPINION

A takeover bid presents the target company’s chairperson with a dilemma.

Do they accept the offer, but potentially leave extra cash on the table?

Or do they reject the offer in the hope that the bidder increases their offer, but put their reputation and their job on the line if the bidder walks away and the share price struggles?

This is the situation Bart Vogel found himself facing when private equity investor TPG made a friendly takeover offer for InvoCare, the Australian and New Zealand funeral company he chairs.

TPG offered A$12.65 a share for InvoCare, a 41 per cent premium on its share price ahead of the bid.

The A$1.8 billion offer was by way of a scheme of arrangement, requiring three-quarters of shareholders to vote in favour of the bid before it goes ahead and allowing TPG to acquire 100 per cent of the company.

But shareholders never got a chance to consider the offer after TPG withdrew its bid for the company, whose brands include Le Pine, White Lady Funerals and Simplicity Funerals.

Basically, InvoCare placed onerous conditions on due diligence – that is, opening up its books so TPG could have a closer look at what it was hoping to buy – that prompted TPG to walk away instead of trying to negotiate.

Takeover battles are always a bit of a dance, with well-rehearsed steps. On the one hand, the target company and its fund manager shareholders talk up the company’s prospects and explain why the bid is too low, but still engage with the bidder. And often the bidder comes back with a higher offer.

But by effectively sending TPG packing before the dance even gets under way, Vogel and his directors may have done shareholders a disservice.

“The board of directors of InvoCare unanimously concluded the indicative proposal did not provide compelling value for shareholders and therefore denied TPG access to full due diligence,” the board said.

It argued the company has “strong future prospects as a leading provider of deathcare services in Australia, New Zealand and Singapore”.

InvoCare argues TPG was taking advantage of a weakness in the InvoCare share price after it reported disappointing results in February.

Fund managers were only too happy to offload their InvoCare shares at its bid price of A$12.65 when TPG was buying them up ahead of its public offer. TPG now holds 19.9 per cent of the company, the maximum it is allowed.

And equity analysts don’t seem to share the InvoCare board’s optimism either – their median price target for the stock is A$10.38. The company has failed to meet analysts’ earnings expectations in each of the past three reporting seasons. It has been unable to make the most of what the industry quaintly calls “excess deaths” in Australia since the easing of Covid restrictions in late 2021.

One of the things about the funeral business is that the market has constrained growth prospects – the number of deaths is largely pre-determined by births many years earlier. Industry players can increase revenue by acquiring competitors; by introducing new services like pet cremations; by charging more – and the funeral industry is already very adept at squeezing large amounts of money out of grieving relatives; or by increasing market share.

Yet, InvoCare has lost market share, delivering growth of about 8 per cent in the last financial year, which lags the broader funeral industry’s 13 per cent gain.

Vogel and his colleagues’ decision to send TPG on its way will come under scrutiny at the company’s annual meeting in late May.

The chairman is up for re-election at the meeting. TPG has yet to say how they will vote, and the amount of support Vogel receives from other shareholders will depend on how they view his handling of the takeover thus far.

Additionally, InvoCare has promised to update the market on its future prospects. The board will be hoping that they’ll be impressive enough to justify TPG increasing its offer.

If they’re not, TPG might come back with a lower offer.

Even if does nothing, TPG holds all the cards. Its 19.9 per cent stake is enough to block any other suitors and it can “creep” its shareholding up by 3 per cent every six months, which will put it in an even stronger position. It can bide its time and creep up the shareholders register before picking an opportune moment to make another bid, probably at a lower price.

InvoCare investors might remember Vogel is also the chairman of automotive software-as-a-service provider Infomedia, which rebuffed buyout interest from three separate bidders last year.

At that time, the board pushed for the suitors to take their bids above the A$1.70 per share that was on offer. Infomedia shares closed at A$1.50 on Friday.

InvoCare shareholders don’t currently have much reason to believe their shares won’t suffer the same fate.