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Infra funds targeted for UK crematoria carve-out

Dignity, the UK’s biggest funeral provider, is looking to carve out and sell its crematoria business in a transaction that could see infrastructure funds get a significant market share of the sector.

Sources said that Rothschild has been appointed as Dignity’s financial advisor for the process and has circulated IMs with the submission of non-binding bids due in February.

Dignity’s attempt to carve out its crematoria business, which comprises 46 crematoria and 28 cemeteries, comes a year after the group was taken private and at a time when funeral providers have been dealing with rising costs impacting their profits.

A consortium comprising its former CEO Gary Channon, founder of insurer Direct Line Sir Peter Wood and UK investment company Phoenix Asset Management took the business private in January 2023, in a deal valuing it at GBP 281m.

The buyers paid GBP 550 pence a share in cash, representing a premium of nearly 30% over the company’s closing share price on 3 January 2023. Dignity’s shares stopped trading on the London Stock Exchange in May.

The crematoria sector has rarely been targeted by infrastructure funds so far. Westerleigh is the only infrastructure fund-backed crematorium operator in the UK, having been acquired by OTPP and USS from Antin Infrastructure Partners in 2016. Most of the UK’s more than 300 crematoria are owned by local authorities.

Rising inflation has recently taken a toll on crematorium operators putting Dignity under financial pressure, according to the company’s 2022 annual report published in June 2023.

The spike in energy prices following the Russian invasion of Ukraine in particular has had an impact in the funeral sector, as crematoria rely on heavy use of gas.

Dignity said in its accounts that its planned strategy was “behind that originally anticipated as it was taking longer to restructure funeral operations” and added that the company was also facing challenges due to staff shortages.

In the report, Dignity said it obtained consent from its bondholders “to permit a potential transaction involving the realisation of value from selected crematoria assets” as a “long-term solution to improve the group’s capital structure”.

The company’s cash reserves as of 30 December 2022 stood at GBP 7.7m, while its operations at the time were also funded by GBP 160.1m Class A notes maturing in 2034 and GBP 356.4m Class B Notes maturing in 2049, listed on the Irish Stock Exchange.

Dignity is also backed by a GBP 50m loan signed on 6 December 2022 provided by the Phoenix UK Fund, the main investment vehicle of its shareholder Phoenix Asset Management.

As part of the conditions of the loan notes, Dignity’s EBITDA must be at least 1.5x the company’s annual debt service cost, which stood at EUR 34m at the time of the latest report.

This covenant was not met on multiple occasions between July 2022 and March 2023, with Dignity paying GBP 34.3m in 2022 to avoid the covenant breach, according to the 2022 annual report.

Dignity and Rothschild declined to comment.