Service Corporation International (SCI), Stewart Enterprises, Inc. (STEI): This Play Could Be Profitable for Investors

Although the “deathcare” industry is usually predictable and unexciting, the pending merger between funeral services provider Service Corporation International (NYSE:SCI) and rival deathcare provider Stewart Enterprises, Inc. (NASDAQ:STEI) has the potential to be very profitable for rank-and-file investors. At the moment, the merger offers a significant arbitrage premium and could create long-term synergies that turn the combined entity into a major player in the space, similar to other recent mergers. Indeed, this deal should be attractive to short-term traders who seek quick profits, as well as longer-term investors who seek yield and growth.

Stewart Enterprises, Inc. (NASDAQ:STEI)

Although the funeral services industry is among the most predictable businesses in existence, it is not completely static. As such, this deal is not without its risks. As tastes change, certain high-margin products and services could lose out to less expensive options that reduce the profitability of the deathcare firms that offer them. As such, investors would do well to take a closer look at these companies as well as the current state of the industry at large.

How the Deal Is Structured

According to the outline of the deal, Service Corporation International (NYSE:SCI) will provide current Stewart Enterprises, Inc. (NASDAQ:STEI) shareholders with cash payments of $13.25 per share on a yet-to-be-determined closing date. Including the debt obligations that Service Corporation International (NYSE:SCI) has agreed to assume, the deal’s total value will come in at about $1.4 billion. Relative to Stewart Enterprises, Inc. (NASDAQ:STEI)’s current per-share price of $13.05, this transaction offers a small premium of about 1.5 percent. Nevertheless, this could prove profitable for nimble-footed investors.

Legal Issues and Potential Complications

Much of this deal’s arbitrage premium may be the result of the legal and regulatory uncertainty that surrounds it. A number of law firms have opened preliminary investigations into the pre-deal “shopping” process as well as the mechanics of the merger’s pricing. If these investigations uncover evidence of shoddy or rushed bid solicitation, shareholder-rights lawsuits and other actions could follow. In the worst case, Stewart Enterprises, Inc. (NASDAQ:STEI)’s shareholders could reject the proposed terms of the merger and force Service Corporation International (NYSE:SCI) to come back with a higher bid.

Although this might not be a terrible outcome for Stewart Enterprises, Inc. (NASDAQ:STEI)’s shareholders, it would create an unseemly amount of volatility and unnecessarily delay a potentially lucrative merger. While it is true that Service Corporation International (NYSE:SCI)’s offer for Stewart did not provide an excellent premium to its pre-announcement share price, it seems to be in line with market-watchers’ opinions of Stewart Enterprises, Inc. (NASDAQ:STEI)’s valuation. As such, investors should be cautious about actively betting against the timely completion of this deal. If all goes according to plan, the merger should close by the end of the second quarter of 2014.