TPG Could Pick Up InvoCare for a Steal

Private equity outfit TPG Global’s indicative, nonbinding offer of AUD 12.65 for shares in wide-moat InvoCare IVC is too cheap. Despite making an offer 41% above the undisturbed closing price on March 6, 2023, the proposal remains 13% below our unchanged AUD 14.50 fair value estimate. We think TPG is looking to capitalise on share price weakness following relatively disappointing 2022 results. TPG has acquired relevant interest in InvoCare of about 17% through 10% in InvoCare shares and 7% in a total return swap. The proposal is highly conditional, requiring support from the InvoCare board, completion of due diligence, investment committee approval, and regulatory approvals (notably from the Foreign Investment Review Board). The InvoCare board is assessing the proposal.

TPG could be attracted to InvoCare’s strong competitive position and dominant market share. 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 InvoCare 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 loosening 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 2032, underpinned by the combined effect of Australia’s growing and ageing population, partially offset by gradually increasing life expectancy.