Dustup In `Death Services'
In the three decades since its founding, Service Corp. International (SCI) has revolutionized the $15 billion U.S. "death-services" business. It has spent $2.4 billion since 1991 to buy up a string of funeral parlors and cemeteries around the globe, forcing an unusually fragmented industry toward massive rationalization. In the process, it has produced blistering growth from a mature business: Sales have more than doubled, to $1.6 billion last year, and SCI shares have soared 37% this year alone.
Now, SCI has taken on Canada's Loewen Group, its biggest rival, creating the makings of a bitter, drawn-out takeover fight. On Sept. 24, Loewen's board unanimously rejected SCI's unsolicited $43-a-share, $2.8 billion acquisition offer. "We are not interested in selling to them," Loewen Chairman Raymond Loewen declared a day later. SCI's board will meet Oct. 1 to decide how "to consummate this transaction," but even Loewen admits that "it would not be consistent with [SCI's] history and personality" for them to walk away from a fight. With Loewen's stock depressed since it lost a huge lawsuit last November, SCI clearly believes it has an ideal opportunity to take out a key rival.
ELBOWS OUT. It has ample reason, too. This year, Loewen has agreed to or completed 196 acquisitions totaling $715 million and teamed with Blackstone Capital Group on two others worth $535 million. With its bid, SCI can either eliminate a competitor that is driving up acquisition prices or force it into a costly share buyback or recapitalization. "If Loewen's out of the picture, we can bring a little more rationale to the acquisition table for all of us," says James P. Hunter III, CEO of smaller Equity Corp. International, of which SCI owns 40%.
The fight pits two men with very similar backgrounds and objectives but vastly different business styles. Loewen and Waltrip, both former funeral directors, fervently believe in consolidating the lucrative but inefficient death-services business. But where SCI tends to install its own talent at operations it acquires, Loewen leaves local managers at the helm. The nice-guy strategy, not surprisingly, has won Loewen fans in the industry. "The reason we selected Loewen is how they have treated us," says Sandy V. Durko, executive vice-president of Rose Hills Co. in Whittier, Calif., which on Sept. 20 spurned an SCI bid to accept a $240 million buyout from a Loewen-Blackstone partnership. Loewen says it has received hundreds of letters from its funeral homes, all opposing an SCI deal.
Such support will only take Loewen so far. It spends 8% on corporate expenses, vs. SCI's 2.5%. While both companies have grown rapidly via acquisitions, SCI's after-tax margins were 11.1% in 1995, considerably outpacing Loewen's 8.7% before charges. And Loewen's balance sheet has been hamstrung by the $135 million charge it took earlier this year to settle a disastrous breach-of-contract suit in Mississippi. Loewen "is not going to win the shareholder-value argument," says Walter Beach, a senior analyst at money manager Widmann, Siff & Co., an SCI shareholder.
No one expects SCI to walk away with Loewen for $43 a share, a 38% premium on Loewen's share price before word of the bid. It could offer $49 a share without incurring dilution, says M. Lynn Detrick of Williams Mackay Jordan & Co. But Darren Martin of Toronto-based TD Securities Inc. says a deal will require around $55 a share--and even then, Loewen may try to scuttle the bid. Under Loewen's bylaws, SCI must acquire 75% of Loewen shares to gain immediate control--a huge hurdle, given Ray Loewen's 15% ownership--though SCI is certain to challenge the provision in court.
SCI has already shown it is nothing if not tenacious. And Waltrip likely is willing to bid high to remove a big rival from his radar. "I expect Loewen to torpedo the deal over egos," says Ernie Heffner, head of Heffner Funeral Homes & Crematory in York, Pa. But ultimately, he says, Loewen's stock will head south again, and "in six months, SCI will get them anyway." That's far from guaranteed. But in this takeover fight, the bid price may soar as high as the battlers' egos.