TPG lifts InvoCare stake to 19.98pc, likely scaring off other suitors

TPG has lifted its stake in the funeral services group to nearly 20 per cent as it eyes off its assets, including a $526m property portfolio.

Private equity firm TPG has a number of opportunities linked to InvoCare.

Private equity firm TPG has crept up the share register of its takeover target InvoCare to capture a 19.98 per cent foothold that will likely strengthen its chances of success and scare off any rival suitors that might want to crash its plans.

TPG revealed on Wednesday that it had lifted its stake in the funeral services group from 17.8 per cent to 19.9 per cent, with that stake comprising direct shares held of 9.8 per cent with the balance controlled through swap instruments and other equity derivatives.

It comes as analysts begin picking apart the $1.8bn takeover offer launched by TPG on Tuesday, arguing that the $12.65 per share offer was a large premium to its last trade before the bid was launched and that there was “likely material downside risk” to the share price if InvoCare rejects the approach.

“While the offer is around a 41 per cent premium to the last close, InvoCare shares have traded at a similar price to the offer within the last year, which makes the board’s decision arguably difficult, given the likely material downside risk to the share price near-term if the offer is rejected, given the underwhelming 2022 result versus expectations and the lack of earnings growth in 2023,” said JP Morgan analyst Russell Gill in a note to clients.

The large stake now held by TPG could also help improve its chances of success.

InvoCare’s board faces a difficult decision.

“Given TPG’s (19 per cent) holding and the benign near-term earnings outlook, we believe there is a low probability of a substantially better offer for the business, with the downside risk from a rejected offer likely to be materially negative to the share price,” Mr Gill said.

On Tuesday, TPG revealed it had bought up an initial 17.8 per cent stake in InvoCare, a leading funeral operator across Australia, New Zealand and Singapore and whose brands include Le Pine, White Lady Funerals and Simplicity Funerals.

It quickly followed that sharemarket raid with an unsolicited, preliminary and non-binding indicative takeover bid.

Shares in InvoCare leapt 35 per cent on back of the takeover offer to $12.08, a bounce from the 11 per cent slide in its share price last month when it reported a swing to a loss of $1.8m for calendar 2022 as volatile equity markets, rising costs and weaker market share impacted its profitability.

The funeral company, which also operates a pet cremations business, had pledged to investors to accelerate its strategies under its five-year plan.

However, the private equity has pounced first and could reap the benefits of its own restructuring of the business if it completes the takeover and takes the company private.

Mr Gill said in his report that aside from InvoCare’s highly strategic 25 per cent market share of the Australian national funeral service market - which would likely take decades to replicate, if possible at all - he believed an acquirer such as TPG could see a variety of opportunities to extract value from the business that may not be readily available in a listed environment.

“While we believe InvoCare has very strategic assets, a meaningful operational turnaround may be more easily achieved in an unlisted environment, where operational expenditure and capital expenditure can be accelerated without the need to appease many shareholders with earnings and dividends in the near term.”

InvoCare’s substantial property portfolio, including owning around 50 per cent of the sites in which it operates ranging from shop fronts to funeral homes and memorial parks, is also attractive.

Much of this property was acquired in decades prior, and the land has never been marked-to-market.

Mr Gill said as at December 2022, InvoCare had $526m of land and buildings on the balance sheet, largely constituting: cemetery land: $107.1m, freehold land: $104.9m, and buildings: $197.8m.

“We believe there could be a material upside from this carrying value (particularly the freehold land) and arguments for better use cases potentially outside of the funeral sector.”