Is rescuing Dignity really the best way to conquer the UK funeral sector?

Dignity, the UK’s biggest and perhaps most embattled funeral business is starting life as a new private company. The deal, by a consortium of current investors led by former CEO Gary Channon, values the equity of the business at £280m.

The challenges facing the new company’s leaders are daunting. Despite the perceived wisdom that COVID-19 and excess death rates over the past 3 years have been a boon for the market, profits in the funeral industry are under pressure.

Market analysts Plimsoll, produce an interactive study of the UK funeral market, examining the winners and losers in the industry and assessing the financial health of the top 1000 deathcare providers.

Plimsoll's most recent assessment shows that profitability has fallen from 7% to 5% in the latest full financial year. Sales growth has also started to decline. Growth rates have come down from 7% to 4%.

The current softening of profit margins across the market is a familiar tale for parts of the UK economy.

Costs are rising. Funeral provision is a large user of natural gas, and the Russian invasion of Ukraine which led to a painful spike in gas prices is impacting the market disproportionately. The costs of cremating the dead are squeezing margins.

Profit margins are being further squeezed as input costs into the funeral sector keep rising. Wage demands, burial fees, and the cost of diesel and raw materials such as the wood used for coffins have all soared in the post-COVID-19 economic situation.

The UK funeral sector is having to adjust to a new economic reality. Buying another company in a time of tighter margins and an economic downturn makes perfect sense. It allows for instant economies of scale, at potentially, lower values. Smaller providers struggling to command real pricing power with suppliers or the promotional resources to attract business at higher prices are therefore at a disadvantage.

All of which begs a pertinent question, “Why rescue Dignity Plc to the tune of hundreds of millions of pounds when there are simpler, more profitable options out there?”.

Put simply, Dignity Plc is a company that generates £353m in revenue from a total capital employed of £1.7 billion. Of that, almost £600m is in loan capital, nearly double their turnover.

Finally, with current liabilities of £178m balanced against current assets of just £124m, the company, by most measures, is borderline insolvent. Any restructuring will be painful, complicated and not guaranteed to work. Is a company in such a state worth saving?

Plimsoll’s latest analysis of the top 1000 Funeral Providers has revealed three more effective strategies to succeed in the funeral sector. We feel each would offer better returns than taking Dignity private:

Strategy 1 – Make multiple, smaller deals rather than just a single big one

The latest Plimsoll Analysis has rated 226 funeral providers as “Highly Attractive” M&A targets.  These are companies that are independently owned, with a big difference between their current and potential value that enjoys above market average growth. Most would command a value below £5m.

For the price of taking Dignity Plc private, a consortium could execute a strategy of continuous acquisitions of 60 – 100 of these undervalued businesses. This would allow for a more structured process, adding profitability to the resulting group and building economies of scale along the way. All without the crippling debt.

Strategy 2 – Become an “angel investor” for those in need of capitalisation

A longer-term strategy is to start again with a new, well-funded investment business that targets businesses that are financially weak. Recapitalising multiple private businesses struggling with increased costs in return for a share of the business might be a lower-risk, higher-reward strategy.

375 of the UK’s leading funeral providers have been rated as Caution or Danger in the latest Plimsoll Analysis. These companies need an injection of shareholder capital to restabilise their financial health. Would becoming activist investors at multiple funeral providers be more commercially fruitful?

Strategy 3 – Be ruthless and target the weak

The final strategy, by far the most controversial, is to target the marketplace's financially weakened providers. Setting up a new provider in local markets dominated by companies without the resources to counter is a cost-effective way to capture market share. The hundreds of millions being pumped into saving Dignity could be used to consolidate market share by expediting the demise of others. With 375 weakened businesses, there are many regions to choose from. – Chris can you clarify this bit?

Plimsoll does not advocate any one of these strategies over another and we wish the investors in Dignity well with their new, private venture. However, all are viable strategies companies will examine in 2023.

Plimsoll provides a simple means to assess all the available options. Whether it is to review your own financial health and preparedness, look at your best M&A options or monitor competitors heading for trouble, the Plimsoll Analysis is a concise, easy-to-read analysis that delivers insight instantly.

For more information on the Plimsoll Analysis covering the Funeral sector, please click here.