Stewart Enterprises, Inc. (STEI), Service Corporation International (SCI): What the Deal Means

Though perhaps not a household name, Stewart Enterprises, Inc. (NASDAQ:STEI) is the second-largest funeral and cemetery goods and services company in the United States, trailing only Service Corporation International (NYSE:SCI). The 100-year-old Stewart Enterprises, Inc. (NASDAQ:STEI) is in the midst of a buyout by Service Corporation International (NYSE:SCI), which would be one of the final steps for the latter to create a nearly unshakable dominance of the death care industry. While shareholders have approved the merger, federal regulators will have the final say in the matter. Let’s take a look at the deal, the state of both companies, and where investors should be putting their money today.

Stewart Enterprises, Inc. (NASDAQ:STEI)

Service Corporation International (NYSE:SCI) is very familiar with acquiring its competitors in the space. In 2006, the company bought the then-No. 2 player, Alderwoods Group, which represented about 5% of the funeral and cemetery market. If the deal with Stewart Enterprises, Inc. (NASDAQ:STEI) goes through, Service Corporation International (NYSE:SCI) will represent 15% of the entire U.S. industry.

Now, this would raise some concerns regarding government intervention and antitrust issues, but according to Reuters, investors need not worry.

Service Corporation International (NYSE:SCI) has made mega-deals like this before, and it knows how to appease regulators’ concerns. In the Alderwoods deal, the company agreed to divest funeral homes and cemeteries across the country, as not to limit competition. For a Stewart-Service Corp. deal, there would likely be the same requisites to make the deal go through.

Regardless of Service Corporation International (NYSE:SCI)’s efforts, the sheer size of the deal and the fact that the FTC asked for more documentation suggests that the deal may take several more months before gaining approval (or the alternative).

Besides the bankers, who is getting the best deal in the pending merger?

If the deal goes through, investors in both companies are set to benefit (Stewart investors already have). Service Corp. shares have risen more than 30% in the past 12 months, while Stewart Enterprises, Inc. (NASDAQ:STEI) skyrocketed on news of the $13.25-per-share buyout offer. Prior to the deal, Stewart Enterprises, Inc. (NASDAQ:STEI) shares traded around the $9 mark.

More compelling, though, is Service Corp.’s potential post-merger. With 15% of the market cornered, an aging U.S. population, and a robust sales force, Service Corp.’s sales should rise comfortably for the foreseeable future. The deal with Stewart would increase Service Corp.’s assets by nearly 20%.

At 17.55 times forward expected earnings, the stock is not bargain-priced, but it offers investors a relatively low-risk play on predictable U.S. demographics. With high-single-digit growth over the next several years, predictable, substantial cash flows, and a management team dedicated to expanding the footprint of the business, the stock is an attractive long-term holding for risk-averse investors.

The article What the Stewart Acquisition Means to Service Corp. originally appeared on and is written by Michael Lewis.

Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 

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