Funeral and Cemetery Merger Great for Shareholders, Maybe Not for Consumers

Service Corp. International (NYSE: SCI) is worth almost $4 billion now and Stewart Enterprises Inc. (NASDAQ: STEI) is worth an enterprise value now of about $1.4 billion. The actual terms and conditions of the buyout will value Stewart at $13.25 in a cash per share, which is more than 35% higher than its last closing price. This values Stewart at more than it has been worth at any point in the past 13 or 14 years, but the share price used to be substantially higher. The move will combine two dividends as well. Stewart had a 2% yield, and Service Corp. now has a yield of about 1.65%, after hitting a new high.

The combined company is expected to have revenues of almost $3 billion, and a pro forma backlog of future pre-need revenue exceeding $9 billion. The two companies have 2,168 locations in 48 states, eight Canadian provinces and Puerto Rico, and they include some 1,653 funeral homes and 515 cemeteries. Of those locations, 282 are combination locations of funeral homes and cemeteries.

Service Corp. said that it expects to generate approximately $60 million in annual cost savings from the combined companies after the merger, although the company noted that the synergies would be fully realized over a 24-month period after the closing date. It expects that it will cost $30 million to reach those synergies.

The company said that it has received a financing commitment from J.P. Morgan Chase Bank to use with its own cash on hand to pay for this cash acquisition. Service Corp. listed only $188 million in cash on its books as of March 31, but its long-term investments are valued at more than $4.5 billion, which likely includes payments from future customers.

Keep in mind that Service Corp. is the largest cemetery and funeral home outfit that exists. That makes this a deal that could fall under regulatory issues and antitrust reviews. If you do not assume that the review will be longer than normal, Service Corp. already said that it anticipates the closing of the acquisition would occur late in 2013 or even in early in 2014.

Investors are betting that this will be a good deal for Service Corp. Usually the company making an acquisition sees the value of its shares fall when a deal is announced. In this case both stocks are rising. Service Corp. shares are up more than 8% at $19.12 and hit a new multiyear high of $19.39. Stewart Enterprises is up 34% at $13.06.