InvoCare: TPG Deal Rises From the Dead, but It’s Still Too Cheap

TPG Global has increased its indicative, nonbinding offer for shares in InvoCare IVC by 3% to AUD 13.00, from AUD 12.65 previously. The higher TPG bid doesn’t come as a surprise. While TPG had pulled its original indicative proposal after board rejection, TPG retained an economic interest of about 20%. The revised bid also offers eligible investors an opportunity to realise the value of franking credits on InvoCare’s balance sheet—AUD 35 million at Dec. 31, 2022—which could close the gap to our fair value estimate to 9%. As part of the proposal, InvoCare is permitted to pay a special dividend, which would reduce the potential scheme consideration by the same amount. A special dividend, proposed to be about AUD 0.60 per share, would provide franking credits of about AUD 0.25 per share, giving a potential value of the transaction to eligible Australian taxpayers of AUD 13.25 per share.

To garner a binding proposal, InvoCare has provided TPG exclusive due diligence. If the proposal becomes a binding transaction, the board unanimously intends to recommend it. There are some hurdles to overcome before this is a done deal, including completion of due diligence and shareholder approval.

But we take an opposing view to the board. We think the revised bid still undervalues InvoCare on a stand-alone basis, and TPG appears to be capitalising on share price weakness following disappointing 2022 results. Despite the proposal being 45% above the undisturbed closing price on March 6, 2023, it remains 10% below our unchanged AUD 14.50 fair value estimate.

Even without a takeover, shares in InvoCare provide compelling value on a stand-alone basis. InvoCare’s wide economic moat is underpinned by intangible brand assets and cost advantages over a long tail of smaller competitors in the highly fragmented funeral services industry. We expect the firm to remain a dominant force in Australian funerals, and benefit from the industry dynamics of Australia’s growing and ageing population.