InvoCare: TPG Global Pulls Proposal, but There’s Still Value on the Table

TPG Global has called off its indicative proposal to acquire all shares in InvoCare IVC at AUD 12.65 per share. The proposal, initially lobbed on March 7, 2023, was rejected by the InvoCare board, but limited due diligence access was offered. While the proposal was 41% above the undisturbed closing price on March 6, it materially undervalued InvoCare, at 13% below our unchanged AUD 14.50 fair value estimate. TPG appeared to capitalise on share price weakness following relatively disappointing 2022 results.

InvoCare might still be a takeover target. TPG maintains an economic interest of about 20% and has requested a board seat at the AGM on May 26, 2023. Even without a takeover, shares in InvoCare are compelling value on a stand-alone basis,. Intangible brand assets and cost advantages over a long tail of smaller competitors in the highly fragmented funeral industry have allowed InvoCare to carve a wide economic moat. 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.

There has been significant volatility in the number of deaths since the onset of COVID-19. Social distancing and an increased hygiene focus in the wake of the COVID-19 pandemic led to much lower deaths in 2020, and subsequent loosening of restrictions caused operational headaches as excess mortality spiked at points during 2022. But mortality should normalise over time. While death rates can fluctuate in the short term, they are stable over the long run. Mortality rates are a function of population size, average age, and life expectancy. From a base of 2019, we forecast the number of deaths in Australia to grow at an average rate of 2.3% per year through to 2032, underpinned by the combined effect of Australia’s growing and ageing population, partially offset by gradually increasing life expectancy.