It looks like our Motley Fool Hidden Gems service is set to lose one of its more boring, but quite profitable selections, AlderwoodsGroup (NASDAQ:AWGI). The company is being acquired for $20.00 per share in cash by Service Corp. International (NYSE:SCI).
For Hidden Gems subscribers, Alderwoods has been an easy company to hold. There isn't a ton of variability in the business, and the investment thesis revolved around quality management and paying down long-term debt to more reasonable levels. In paying down the debt, the company was reducing interest payments and increasing free cash flow, which leads to more debt being able to be paid down. In the last two years, the company had trimmed its long-term debt load by 40%. With today's offer, the total return in the two-and-a-half years since it was initially recommended is about 170%. Not bad for a boring little company.
While the progress on the debt has been solid, it also largely fulfilled part of the investment thesis. Growth in free cash flow from business growth and not just debt reduction was becoming a more important part of the investment thesis. Here Alderwoods was never going to light the world on fire, but given its valuation, it didn't have to. However, on the last conference call, management hinted that in the near term -- and perhaps the intermediate term -- cost pressures would absorb a large part of the revenue growth.
Although I had the shares valued slightly higher before management hinted at tepid growth, it is tough for me to complain about a $20.00 per-share cash offer. The offer is an 11.7% premium against the closing price from last Friday. Since the share price is still a bit below the $20.00 per share being offered, it looks like the market agrees and isn't expecting a higher offer to come along -- though anything is possible.
If you own shares in Alderwoods and have a better idea to invest in right now, it's probably not worth waiting for the extra $0.60-$0.70 per share to materialize. However, if you don't have any hot ideas to put the money into, there's no harm in waiting until you do. In the meantime, it's likely you'll get the other 3% in appreciation when it comes along.
For more drop-dead Foolishness:
Alderwoods Group is a Motley Fool Hidden Gems recommendation.
Nathan Parmelee owns shares of Alderwoods, but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
