What the Stewart Acquisition Means to Service Corp.

Though perhaps not a household name, Stewart Enterprises (NASDAQ: STEI  ) is the second-largest funeral and cemetery goods and services company in the United States, trailing only Service Corp. International (NYSE: SCI  ) . The 100-year-old Stewart is in the midst of a buyout by Service Corp., which would be one of the final steps for the latter to create a nearly unshakable dominance of the death care industry. While shareholders have approved the merger, federal regulators will have the final say in the matter. Let's take a look at the deal, the state of both companies, and where investors should be putting their money today.

Vacuum 
Service Corp. International is very familiar with acquiring its competitors in the space. In 2006, the company bought the then-No. 2 player, Alderwoods Group, which represented about 5% of the funeral and cemetery market. If the deal with Stewart Enterprises goes through, Service Corp. will represent 15% of the entire U.S. industry.

Now, this would raise some concerns regarding government intervention and antitrust issues, but according to Reuters, investors need not worry.

Service Corp. has made mega-deals like this before, and it knows how to appease regulators' concerns. In the Alderwoods deal, the company agreed to divest funeral homes and cemeteries across the country, as not to limit competition. For a Stewart-Service Corp. deal, there would likely be the same requisites to make the deal go through.

Regardless of Service Corp.'s efforts, the sheer size of the deal and the fact that the FTC asked for more documentation suggests that the deal may take several more months before gaining approval (or the alternative).

Besides the bankers, who is getting the best deal in the pending merger?

Win-win 
If the deal goes through, investors in both companies are set to benefit (Stewart investors already have). Service Corp. shares have risen more than 30% in the past 12 months, while Stewart skyrocketed on news of the $13.25-per-share buyout offer. Prior to the deal, Stewart shares traded around the $9 mark.

More compelling, though, is Service Corp.'s potential post-merger. With 15% of the market cornered, an aging U.S. population, and a robust sales force, Service Corp.'s sales should rise comfortably for the foreseeable future. The deal with Stewart would increase Service Corp.'s assets by nearly 20%.

At 17.55 times forward expected earnings, the stock is not bargain-priced, but it offers investors a relatively low-risk play on predictable U.S. demographics. With high-single-digit growth over the next several years, predictable, substantial cash flows, and a management team dedicated to expanding the footprint of the business, the stock is an attractive long-term holding for risk-averse investors.

More from The Motley Fool 
Obamacare is rewriting the rules for the health care industry, and in the process of doing so, it's creating massive opportunities for investors to get ridiculously rich. How? By investing in a handful of specific health care stocks. In this free report, our analysts walk you through these opportunities and the companies that are positioned to exploit them. The informational edge contained in it is invaluable, but can only be exploited profitably while the rest of the market remains in the dark. To access this free report instantly, simply click here now.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2619608, ~/Articles/ArticleHandler.aspx, 7/24/2014 4:56:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement